Morningstar | Telstra's Revised Guidance Storm in an NBN Tea Cup. See Updated Analyst Note from 05 Sep 2018
We view the 1%, or AUD 100 million, cut to Telstra's fiscal 2019 EBITDA guidance to between AUD 8.7 and 9.4 billion as storm in a tea cup, with no impact on our AUD 4.40 fair value estimate. The telecom space is on the verge of seismic consolidation activities and possible structural changes with repercussions for narrow-moat Telstra. Against this backdrop, dwelling on marginal near-term earnings impact of tweaks to National Broadband Network's, or NBN's, rollout schedule seems trifling.Granted, NBN's revised rollout forecast for fiscal 2019 (5.5 million premises activated, from 6.9 million) will cut its compensation payments to Telstra. However, this is just a timing issue as there is no change to NBN's long-term goal of completing the rollout by 2020. The earnings hit to Telstra will also be cushioned by relief from NBN cost-to-connect charges and customers remaining longer on its own network while allowing the group to keep legacy margins from wholesale customers a little longer. As such, our estimates are intact, with our fiscal 2019 AUD 9.0 billion EBITDA forecast within the revised guidance range.
What is not trifling is the implication of the proposed TPG Telecom-Vodafone merger. While the combined entity will be formidable, the potential for the mobile industry to remain a three-player race is still better for competitive dynamics than having an aggressive, price-led challenger such as TPG invading the market with its own network. Further, the intention for TPG and Vodafone to jointly bid for the upcoming 5G spectrum is likely to reduce competitive tension in the auction, with positive repercussions for the incumbents.
Despite its recent rally, shares in Telstra remain at a material discount to our intrinsic assessment. Heightened competitive intensity and NBN's margin-crunching impact are well-known. What is under-appreciated is the upside from the AUD 2.5 billion cost-out story and the potential benefits of Telstra's fightback plan for customers.
Telstra is engaged in providing telecommunications and information services for domestic and international customers. Co.'s operating segments are Telstra Retail, Global Enterprise and Services, Telstra Operations, and Telstra Wholesale. As of June 30 2016, Co. provided retail fixed data services to 3.4 million customers, retail fixed voice services to 5.7 million and domestic retail mobile services to 17.2 million customers.
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