Telstra shares have fallen after the telco’s ratings were downgraded due to intense competition across its core businesses and lower margins.
Standard and Poor’s (S&P) Global Ratings said Telstra’s incumbent position in the industry had been ‘diminished’ and lowered its long-term issuer and issue ratings on the company to A-minus, from A, and the short-term rating to A-2, from A-1.
The ratings agency did, however, describe Telstra’s outlook as stable and acknowledged the company’s dominant network infrastructure.
‘The downgrade reflects our view that Telstra’s strong incumbent position within the Australian telecommunications industry has diminished somewhat,’ S&P Global Ratings said.
‘Competition has intensified across Telstra’s core businesses and the company has had to accept lower margins as a means of protecting its dominant market share.’
Telstra shares were down three cents, or 1.05 per cent, to $2.84 by 1338 AEST.
The ratings agency said Telstra’s vulnerability to an erosion of its price premium and dominant market share had increased over the past few years, despite elevated network investment.
It also flagged competition from mobile network operators which have made large investments in their networks and product offerings, and forecast competition to further intensify with the likely entry of TPG Telecom as Australia’s fourth mobile network operator.
‘In our opinion, there are execution risks associated with the company’s strategic initiatives,’ the agency said.
Telstra has recently faced scrutiny after warning tough competition and the NBN are putting a squeeze on earnings that will persist into next year.
Earlier in the month, Telstra’s share fell to a seven-year-low after the telco said despite winning customers, the amount each subscriber spends is falling in both fixed broadband and mobiles.
S&P Global Ratings said the potential for an upgrade was ‘unlikely’ in the short term, given the group’s structural industry challenges, but would consider an upgrade if Telstra adopts a more ‘conservative’ financial policy and is able to maintain consistent cash flows from its core operations.