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Morningstar | No Bargain but 5G Spectrum Auction Could Have Been a Whole Lot Worse for Australian Telecoms

The outcome of the 5G spectrum auction was broadly in line with our expectations, with no impact on our fair value estimates for Telstra (AUD 4.40) and TPG Telecom (AUD 6.10), both narrow-moat-rated. The headline total of AUD 853 million raised by the Australian Communications and Media Authority is susceptible to hyperventilated claims of overpayment. However, this needs to be put in context.

While the average AUD 0.29/MHz/population realised for the real estate in the 3.6 GHz band was hardly a bargain, it was below the AUD 0.50 paid by Telstra for similar 5G spectrum in Brisbane last year and the AUD 1.30-plus recently shelled out by the National Broadband Network in Tasmania. Importantly, bidding tension could well have reached those levels, had Vodafone Australia and TPG participated in the auction as separate entities, rather than as a joint venture pursuant to the recent merger agreement. Remember, to kick-start its ambition to become the fourth mobile network operator, TPG bid AUD 2.75/MHz/pop (or AUD 1.3 billion) for spectrum in April 2017. It was an amount that certainly warranted hyperventilated claims of overpayment and, coupled with unprecedented competition in the mobile market, may have contributed to TPG's subsequent decision to merge with Vodafone.

The total AUD 386 million (AUD 0.03 per share) outlaid by Telstra for the 5G spectrum can be comfortably accommodated within our circa AUD 4.5 billion per year capital expenditure forecasts for the medium term. Similarly, TPG's half share of the AUD 263 million paid by its joint venture with Vodafone, or AUD 132 million (AUD 0.14 per share), is within the envelope of our circa AUD 300 million per year medium-term capital expenditure forecast for TPG.

Investment appeal-wise, Telstra remains our preferred stock, trading at a 31% discount to our intrinsic assessment, while investor enthusiasm for the yet-to-be-approved merger with Vodafone has driven TPG's stock price 20% above our fair value estimate.