NBN’s 500,000 Reduction In FY2020 Connected Premises Pushes Telstra To Revise FY20 Guidance

Recent Update:

Last Friday on 30 August 2019, NBN Co’s released its corporate plan for 2020 and updated information related to their outlook for FY2020. In its outlook, NBN projected a reduction in the total number of premises to be connected in FY2020 from 2.00 mn to 1.5 mn.

Telecom major, Telstra Corporation Limited (ASX: TLS), on 15 August 2019, had released its guidance for FY 2020 based on NBN Co’s Corporate Plan 2019. Incorporating NBN’s updated 2020 Corporate Plan Telstra revised its FY2020 guidance and released the same to the market on 02 September 2019.

Telstra and NBN Co’s relationship:

On 20 June 2010, NBN and Telstra reached a Financial Heads of Agreement under which NBN gained access to the facilities of Telstra as well as progressive migration of Telstra traffic onto the National Broadband Network based on the regulatory approval. The agreement was worth $9 bn.

The agreement also allowed NBN Co to access TLS fit-for-use infrastructure. The deal was aimed at reducing infrastructure duplication and simultaneously creating more efficient roll-out of the broadband network. Furthermore, as per the deal, TLS would move its customers from copper and HFC networks to NBN fibre. On 23 June 2011, NBN Co and TLS signed a binding Definitive Agreements allowing NBN to gain access to Telstra infrastructure for a minimum of 35 years.

NBN Impact:

Taking into account the updated NBN corporate plan for 2020, Telstra informed the market that there would be an impact on its guidance on total income, underlying EBITDA and the amount of included in-year nbn headwind, Net one-off DA receipts less nbn net cost to connect and Free cashflow after operating lease payments as noted in the chart below. Further, the change has resulted in Telstra to update its FY2020 cost reduction target from $660 mn to $630 mn.

The 500k reduction in NBN’s forecasted premises comprises of 400,000 reduction in Brownfield premises and a 100k reduction in Greenfield premises, which were to be connected in FY20. The Brownfield premises reduction has the most significant material impact on guidance.

However, the company confirms that the NBN impact would not change the previously provided view to the market that the underlying EBITDA Ex of in-year NBN headwind is expected to grow by up to five hundred mn in FY20. It was estimated that the NBN in-year headwind would be $0.8 to 1 bn. Post the release of the NBN Co’s Corporate Plan 2020; the range is now in between $0.6 to 0.8 bn. Around $100 mn would be in the network payment, and $100 mn in wholesale legacy earnings decline.

FY2019 Results at a Glance.

Telstra, in FY2019, delivered results in line with the expectation. It also made robust progress against T22 strategy. In the first year of its T22 strategy, the company was able to decrease the number of Consumer and Small Business plans from 1800 to 20, helping the customer to choose from simpler plans. It removed surplus data charges in Australia and deployed no lock-in plans for fixed as well as mobile. During the period, TLS also launched commercial 5G service and reported a 22% decrease in the drop in calls to the call centre.

On reported basis, the total income for FY2019 declined by 3.6% to $27.8 bn, earning before interest taxes depreciation and ammortisation declined 21.7% to $8.0 bn and net profit after Tax declined by 39.6% to $2.1 bn. On the guidance basis, the total income decreased by 2.6% to $27.8 bn, EBITDA by 11.4% (after excluding the restructuring cost) and underlying EBITDA by $11.2% to $7.8 bn. The company also noted a $456 mn, which is equivalent to 6%, reduction in the underlying fixed cost.

The major cause of the decline in the EBITDA was due to the NBN. TLS absorbed ~ $600 mn negative recurring EBITDA headwind during the reporting period. TLS estimates ~ $1.7 bn EBITDA impact due to NBN since FY2016.

On the positive front, the company witnessed constant growth in the customer. Around 378k net retail postpaid mobile services were appended, which includes 181k from Belong. Overall, the retail mobile postpaid handheld facilities reached 8.2 mn.

Conclusion:

It cannot be denied that the company has been impacted by nbn, but at the same time, the company was able to achieve its guidance and was able to build strong momentum on the back of T22 strategy. As highlighted by the company in its report, the company will be facing the impacts of nbn and also tough competition. The company is midway through the negative impact from NBN. It also expects underlying earning before interest taxes depreciation and ammortisation (Ex of in-year nbn headwind) to increase by ~ $500 mn in FY2020.

Telstra at present is at an inflection point with respect to technology, telecommunication and T22 would help TLS to attain that position.

Stock Performance:

The shares of TLS have provided a YTD return of 33.74%. However, in the past 5 days, the shares of TLS have given a negative return of 1.89%. The shares on 4 September 2019 opened at a price of A$3.570, down by A$0.04 from its previous close. By the end of the day’s trading, TLS’s shares closed at A$3.575, down by 0.97% as compared to its previous closing price. TLS has a market cap of A$43.93 bn, with an annual dividend yield of 2.77%, ~ 11.89 bn outstanding shares and a PE ratio of 20.110x.

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