Final stage of NBN review released
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 02 October 2014, 1:40 PM
- Sectors Covered:
- Telecommunications, Technology
The report is pro-infrastructure competition and in favour of undoing the monopolistic legislation, although it is unlikely to happen quickly.
In our view its a positive for the industry and consumers and it paves the way for Telstra and the NBN to finalise their legacy NBN agreement.
This suggests that Telstra, Optus, etc may be able to compete with their existing infrastructure (against the likes of TPM and NBN). This was (and still is) the key stumbling block in TLS/NBN negotiations but looks likely to be reversed, in our view.
The report recommends breaking the NBN into competing units where market forces can allow the best solution to prevail. According to the report, and also our view, this is ultimately the best outcome for consumers and telco investors.
Existing infrastructure (legacy copper/cable TV/fibre), NBN fibre, NBN satellite, NBN wireless, and NBN FTTX can compete for the benefit of the consumer.
"Statutory obstacles to market entry and other barriers to competition should be eliminated or at least reduced, while still ensuring regulation can deal promptly and effectively with any anti competitive behaviour."
What it all means
In our view, this looks like a return to the good old days, pre the NBN and monopolies. We view this as a positive for Telstra and TPG Telecom.
Although in fairness we think TPM investors have already written off the NBN so argue this is priced in. TPM's infrastructure advantage (at least relative to Tier 2 ISPs) is likely to be maintained into the future. We expect that Telstra and Optus will up the stakes in terms of leveraging their infrastructure (which is significantly greater than TPM's).
We also highlight that while TPM has a higher EBITDA margin than peers, return on invested capital across the Tier 2's is similar. TPM's business model is just more capital intensive than peers (they are swapping opex for capex) which does not necessarily make it a better business (unless they can get substantially more customers onto their network).
As we've mentioned for a number of years TPM is the not only credible infrastructure competitor. We think the government is backing away from a metropolitan NBN and will look for other ways to fund high speed regional internet access (other than taxing the metro customer through a monopolised NBN).
Investment view
Telstra remains our preferred telco. We have an Add recommendation on the stock and A$6.00 target price.
More information
More detail can be found on the Government's website. Morgans clients can also login to access our detailed research on the Telco sector. If you are not a Morgans client and would like more information, please contact your nearest Morgans office.
Disclaimer(s): Analyst owns shares.
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