Telstra Wins Regardless of Aussie Electoral Outcome

By Ari Charney • April 10, 2013 • Pacific Digest

With national elections a little more than five months away, Australia’s ruling Labor government remains about 10 points down in the polls against the Liberal-National Coalition. However, five months is a relative eternity in Australian politics, as most campaign seasons are less than six weeks in duration, so a further narrowing of that spread is still possible.

Back in late January, embattled Prime Minister Julia Gillard surprised voters by announcing the election date–Sept. 14–an unprecedented eight months in advance. Some pundits speculate the move was undertaken to firm her grip on her struggling party, while giving her ample time to use her incumbency as an advantage to wear down the opposition. Indeed, the opposition Coalition has faced criticism for its lack of policy specifics, aside from its promise to scrap the carbon tax as well as the tax on mineral and mining profits.

But this week, the Coalition sought to remove uncertainty surrounding its alternative broadband policy, which was a key concern for Australian telecom giant Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY). Shareholders had been worried that the company could receive less than the AUD11 billion it’s due as part of its contract to allow the National Broadband Network (NBN) to replace its extensive copper network with fiber to the premises (FTTP).

The NBN is a 10-year AUD37.4 billion project intended to modernize Australia’s aging copper network, which is largely owned by Telstra. After two years of contentious negotiations, Telstra finally hammered out a deal last year with the government in which it would receive compensation on a rolling basis as its copper network is shut down and replaced by FTTP.

However, the Coalition’s plan is slightly different; it calls for a cheaper fiber-to-the-node (FTTN) network that will piggyback on Telstra’s existing copper network, as opposed to eliminating it entirely. If the Coalition wins power in September, the current NBN plan would therefore require a certain amount of renegotiation. And its less ambitious scope led to fears that Telstra might not receive the amount previously contracted.

But the Coalition struck a conciliatory tone toward Telstra, with Opposition Leader Tony Abbott asserting: “We aren’t interested in going to war with Telstra. I think we have seen too much conflict between the government and Telstra in the past.”

And now that some of the broad details of the Coalition’s plan are known, it appears that Telstra’s eventual remuneration would be neutral at worst, but possibly higher than the original AUD11 billion.

The Coalition’s scaled-down approach would cost just AUD20.4 billion and create a network where 71 percent of the fiber is run to neighborhood nodes, as opposed to individual premises. Much of the remaining network would extend all the way to the premises, but most of that would occur with new construction where new connections would need to be created anyway, making FTTP cheaper and easier to implement in those cases.

The Coalition also plans to leave existing urban broadband networks in place for the time being, instead focusing its efforts on rural areas and deep suburbs where broadband needs are greatest. And it appears Telstra would retain ownership not only of the “last mile” of copper wire that would necessarily remain in place under FTTN, but also its existing broadband networks in urban areas.

Additionally, the faster rollout resulting from the Coalition’s plan, which would be completed two years ahead of the current schedule, would also result in accelerated payments to Telstra. The aforementioned amount that Telstra is slated to receive in its contract with the government was calculated according to net present value, since the payments occur as certain milestones are achieved instead of being disbursed as a lump sum. As such, delays in the government’s labor-intensive FTTP plan reduce the value of those payments.

In fact, Citigroup analysts said that faster payments coupled with ownership of the “last mile” of copper wire under FTTN could boost the net present value of Telstra’s deal to AUD13 billion. That could also lead to a significant boost in the telecom’s AUD0.14 semi-annual dividend, which currently yields 6.1 percent. Citi analysts believe Telstra could pay an AUD0.40 dividend (AUD0.12 special plus AUD0.28 ordinary) from 2016 through 2020. Under that scenario, Citi values the company at AUD4.56 per share.

However, Telstra’s stock currently trades near USD4.79 per share, which is well above our buy target of USD3.50.

The Roundup

For the latest information on our Portfolio Holdings, please see the forthcoming issue of Australian Edge, which should be posted to the website on the evening of Friday, April 12.

Here’s where to find discussion of earnings for AE Portfolio companies, most of which just reported fiscal 2013 first-half results. Some posted results for 2012, while others report on completely different schedules. We’ve included the next reporting dates for those companies. Please consult the Portfolio tables at www.AussieEdge.com for current advice.

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