The National Broadband Network (NBN) has changed the competitive landscape dramatically and by June 2017 the NBN will account for 30% of all household fixed line internet connections, which makes the implications hard to ignore going forward. Telstra has been progressively releasing the implications to its earnings and details of how it is looking to replace the earnings gap. We believe the most eloquent, albeit overly simplistic, way to explain this earnings transition is in the chart adjacent which shows that Telstra will lose ~30% of its EBITDA but is taking steps to limit this to around a 7% (or A$770m) loss, assuming everything goes to plan.
We also need to point out that Telstra gets one-off compensation to the tune of A$4bn (after tax and discounted at 10% back to 2010), which is not factored into this chart. This extra capital (after paying for one-off items like restructures and cost to connect to the NBN) can be used to replace this missing 7% via building out existing earnings streams, buying more earnings streams and/or buying back its own shares. We do expect Telstra will emerge in a strong position post 2020 and believe that the dividend is maintainable but it’s going to be a messy few years to get there. Key assumptions in the chart above which get us to the end position are as follows:
- We assume Telstra has 50% NBN market share (broadly similar to current levels). This equates to 4.1m subscribers for which Telstra pays A$43 per month to the NBN in access costs.
- We assume Telstra loses half of its A$2.6m wholesale EBITDA (since 52% of Telstra’s wholesale subscribers are fixed subscribers and many of these customers will buy directly off NBN rather than Telstra).
- NBN payments to Telstra will reach ~A$1bn per annum as NBN rents ducts and other infrastructure off Telstra to put their NBN cables in.
- Telstra is aiming to remove A$1bn in operating costs by 2020 as it simplifies the business and no longer has to support the last mile of copper.
- Telstra has flagged an additional A$1bn per annum of capex over the next three years and it expects this additional capex will generate around A$500m in additional EBITDA (from new revenue and business improvements).
- Telstra has invested less than A$1bn in new businesses (including Telstra Health, Telstra Software Group and Telstra Ventures), which currently cost Telstra A$172m in EBITDA in FY17. It expects these businesses to reach EBITDA breakeven by 2020, which means they will no longer have a negative impact on EBITDA. It won’t be an easy task but Telstra has a solid plan to restructure and reposition the business for a post NBN world. This, combined with deploying the A$4bn in one-off capital (to build, buy and buy-back), should mean Telstra’s dividend is sustainable in a post NBN world.
Contributed by Nick Harris, Senior Analyst, Sectors Covered: Telecommunications, Technology and Financial Services
Why no consideration of a Telstra split into 4 separate listed vehicles. How much is the Mobile business worth etc. What valuations of each of the businesses when split? Consider the implications just from untying the government noose on Telstra for every decision they make!