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Blog

Telstra Corporation

Nick Harris

NBN delay causes drag on FY18 earnings

Telstra Corporation (TLS) has revised down its FY18 guidance due to the impact of the NBN announcing it would cease sales of its HFC technology for 6-9 months, as well as the NBN's updated 2018 corporate plan.

FY18 Guidance comprises:

  • Total income: A$27.6-29.5bn (-2.4% mid-point);
  • EBITDA: A$10.1-10.6bn (-5.5% mid-point);
  • Net one-off NBN DA receipts less NBN net C2C: A$1.4-1.9bn;
  • Capex: A$4.4-4.8bn (unchanged); and
  • Free cashflow: A$4.2-4.7bn (-4.3% midpoint)

If not for the NBN announcements, guidance would be unchanged. TLS noted the delay will be 'modestly financially positive to TLS over the full rollout", i.e. TLS will still receive the one-off payments (just a bit later), and will get the benefits of using its existing higher-margin infrastructure for a longer period of time (more on-net than off-net margins).

TLS also reaffirmed its expected FY18 total dividend to be 22 cents per share fully-franked (comprising of ordinary and special dividend) as stated at the FY17 result.

Positively, Australia's mobile network is in the top ten globally

Research firm OpenSignal recently released its speed test of Australia's mobile network. While our fixed line network is clearly stumbling, our mobile networks are in the top ten globally, ranking 7th of 77 countries globally tested. Australia's average 4G speed (tested on 3.8m devices) was 34.1 Mbps. This is 3x faster than Australia's average fixed line speed (11.1 Mbps in Q1 2017 according to Akamai) and well above the global average speed of 16.6 Mbps.

In our view, wireless technologies are a real threat to the NBN, and we believe the NBN's economics are destined to fail. We think the NBN will have to lower last mile access prices which would ultimately be a positive for telco and TLS's earnings (relative to expectations for a large decline). Our view is that this could happen in FY22 (when the last customer is forced onto the NBN and numbers are irrefutable). However, we are increasingly seeing evidence that this could happen earlier.

The NBN is a political problem (due to consumer/voter discontent). It is possible, although maybe an extreme view, that the government could look to write-off the approximately A$30bn of equity invested in the NBN and lower last mile access costs. This would, in our view, solve a significant part of the NBN's speed problems. Having the NBN remove the CVC change and simply charge the current line rental fee (AVC) would (we think) de-bottleneck speeds and likely impress the electorate.

Investment view

We believe investors are not paying for any potential upside around competing technologies (and the potential NBN failure) and that downside is priced into Telstra's valuation. Over the medium term we believe there is upside risk to TLS's earnings.

We maintain our Add recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Telstra Corporation (TLS). Alternatively, please contact your nearest Morgans office for access.

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