In June 2018, Telstra Corporation (TLS) provided FY19 guidance which included significant contributions from the NBN's FY19 net one-off disconnection payments (specifics were not known at the time but expected numbers were coming down). On the 31st of August 2018, the NBN released their revised business plan. Following that, TLS tweaked their guidance to accommodate this.
It seems TLS is better at forecasting the NBN's rollout plans than the NBN has been (the gross TLS downgrade was 13% vs the gross NBN downgrade of 20%). Given TLS has a number of offsetting factors the net result is a 1% downgrade to FY19 EBITDA guidance at the midpoint. The NBN's FY18 business plan had forecast 6.9m active households by June 2019 vs the new NBN forecasts of 5.5m active households (a 20% downgrade). FY20 targets have been downgraded to 7.5% to 7.5m households (from 8.1m in the prior plan).
We change our forecasts marginally to include the NBN's FY19 target of 5.5m active households (+1m year on year). We do not think the NBN will achieve their FY20 target (which requires +2m net add year on year). Instead we forecast FY20 to be at similar levels to FY19.
Why this matters
NBN pays TLS a per household disconnection payment and these net NBN payments (after paying the NBN cost to connect) account for approximately 18% of TLS's FY19 EBITDA. On our FY20 forecast these are largely flat year on year but increase to 21% of EBITDA. These disconnection payments will be substantially higher (approx. A$1.6b) if the NBN hits their FY20 target, but history suggests this isn't a good bet to take.
We have made immaterial changes to our FY19 forecasts (a -1% downgrade to EPS). Our valuation and share price target remain unchanged (Morgans clients can login to view our share price target). Telstra noted that the "anticipated changes will be financially positive to Telstra over the full rollout due to the effects of the natural hedge".
Upside risks relate to a share price re-rating as investors contemplate valuing "Infra Co" earnings more highly than Telstra retail earnings and/or once the market gains comfort with what sustainable EBITDA is. We estimate its approximately A$8.5b and this should value the core business at A$3.26 per share with upside gains from one-offs on top of this. Downside risks relate to management's ability to clearly articulate TLS's sustainable EBITDA and deliver the cost out steps required to get there.
Competition in the sector should peak in FY19. While there is a risk that competition intensifies, our view is that the TPG Telecom and Vodaphone merger is, in the short term, economically rational and good for market dynamics as the merged TPG/Vodaphone will initially focus internally.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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