Telstra Corporation: NBN delays strike again

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
03 September 2019, 12:44 PM
Sectors Covered:
Telecommunications, Technology and Financial Services

  • The NBN’s updated corporate plan now forecasts about 0.5m less households being forcibly disconnected from TLS and placed onto the NBN. NBN now forecast 7.0m active NBN HHs by 30 June 2020 (from a 7.5m forecast twelve months ago).
  • This change alone has led to TLS and us to downgrade FY20 EBITDA expectations by ~2.5% and free cashflow by a similar amount.
  • The net result is ~5% EPS downgrades to our FY20 forecasts and a ~1% downgrade to our valuation and price target which falls (Morgans clients can login to view price targets and our detailed reports).  

NBN business plan

Each year the NBN provides its updated Business Plan which attempts to forecast activity over the next three years.

To-date 83% of the NBN is now built and this should be 95% by June 20.However, people still have years to migrate onto the NBN and their most recent update anticipates that they will migrate 0.5m less households (HHs) than they forecast twelve months ago.

The NBN cut their forecast by 25% (from 2.0m to 1.5m HHs disconnected in FY20). There were 5.5m active NBN HHs at 30 June 2019. The NBN now forecasts 7.0m active NBN HH’s by 30 June 2020 and 8.1m by 30 June 2021.  

What this means for TLS 

TLS get paid a one-off disconnection payment for each HH that is disconnected from the TLS network and connects onto the NBN.

As a consequence of there being 0.5m less in FY20 than originally forecast TLS get paid about A$400m less revenue. After the cost to connect customers onto the NBN network, this equates to A$300m less EBITDA. Partially offsetting this is the fact that TLS gets to keep its higher margin on-net customers for longer so gains an additional A$100m EBITDA.

Its costs an extra A$30m to maintain the older network. The net result is TLS expects to be about A$230m worse off from an EBITDA and A$100m worse off from a free cash flow perspective. TLS also noted that they no longer anticipate FY20 as the peak NBN headwind year. This is now likely to occur in FY21.

It is now anticipated that 81% of HH’s will be on the NBN by June 2020 and peak NBN headwinds for TLS will therefore occur in FY21.  

Investment view – Add retained 

We have reduced our forecast to reflect changes to the NBN’s updated corporate plan and the subsequent impact on guidance. In addition to this we have made further cuts to FY21 to reflect this now being the year of peak NBN headwinds for TLS.

Our EPS forecasts reduce by 5% and 8% respectively and our valuation and price target by 1%. Our equally weighted DCF and Sum Of The Parts valuation reduces to A$4.46 (from $4.49). In our view the core investment thesis relates to TLS successfully delivering on their cost out program. However, there are a number of positive dynamics in play that could ease this pressure.

Now that we are past the 60% mark on NBN migrations competitive intensity is lessening.

While price to access the NBN continue to track higher, the other side of the equation is that Telcos including TLS are starting to charge consumers more for access to the NBN \ fixed line as well as for mobile services.

This suggests a return to more rational economics.

More information

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

Disclaimer: Analyst owns shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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