Telstra Chairman Lashes Out on NBN: Will the TLS Share Price Respond?

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Investors will have likely kept a keen eye on Telstra Corporation Ltd [ASX:TLS] today as the Telco giant conducts its annual general meeting.

Shares in the blue chip company moved in the early hours of trading today after the Chairman’s address to shareholders was released on the ASX.

The share price dipped a couple of cents upon opening, but is now up 1.14% at time of writing, sitting at $3.55.

What is likely of most interest is Chairman John Mullen’s comments on the NBN, and his admittance that Telstra ‘must bear part of the blame’ for the project now costing the country over $50 billion.

The rollout was intended to be a $4 billion subsidy project, but Telstra’s submission of an incomplete tender forced the government to alter their plans.

Mullen noted the impact ‘a challenge of this magnitude’ has made on the company.

Chairman says we could have had the NBN for free

In his address, Mr Mullen claimed:

‘…with the benefit of hindsight…it is my view that over the last 10 years private sector competition between strong players such as Telstra, Optus, TPG and others was always going to build 100MB broadband access and speed to the majority of the population of Australia, in an ongoing competitive landscape and at no cost whatsoever to the taxpayer.’

Indeed, we noted here at Money Morning that Telstra’s downturn in share price at the start of this month was a sign that Telco competition could be increasing with the potential TPG-Vodafone merger.

That said, as Mullen also admits, the NBN ‘is here to stay’ and ‘it is in Telstra’s interest, the industry’s interest and the country’s interest to do all we can to make the NBN successful.’

At the moment, however, NBN doesn’t seem to be cutting it.

Mullen noted the Speedtest Global Index test (conducted in August), put Australia’s fixed broadband line at 58th place in the world in terms of speed — a dreadful result when compared to the same test on our mobile network, which is currently ranked second.

Aside from performance, the NBN has also caused a financial blow to our fixed broadband providers, despite compensation paid to nationalised operators.

For Telstra, it has led to a 50% reduction in NPAT which has flowed through to the share price.

TLS shares have tanked in recent months, down around 11% since the beginning of August.

Telstra thinks competition is key

Mullen accepts ‘there is no magical solution’ to make up for the NPAT loss, but insists the T22  program will help Telstra respond adequately to the changing telco market.

He also noted that, contrary to the popular assertion, NBN costs have been kept down thanks to Telstra giving NBN access to their pre-existing fibre/pipe network in exchange for payment.

But a hurdle that can’t seem to be jumped is the fact that NBN is disregarding its original mandate to remain a wholesaler, as noted by Vocus Group’s Ltd [ASX:VOC] CEO last week.

The industry’s objection was made clear in Mullen’s address:

It seems inequitable that the NBN can now…sell directly to our customers…but reciprocal competition from RSPs remains restricted…[they] have to stay within their mandate and cannot sell to the NBN’s own protected market in return.’

Mullen added his own belief that ‘were the NBN opened to competition, wholesale broadband prices in Australia would fall materially.’

He then addressed the negative press Telstra has been copping for suggesting wholesale pricing gets dropped, which would be financially beneficial to Telstra, who have to factor in this cost when determining profits from sales.

Mullen noted that higher, unaffordable prices would result in fewer telco competitors, thereby continuing the upward price trend.

Telstra will compete either way, but surely a reduction in the wholesale price, a competitive market, and lower prices for consumers has to be a better outcome than a high priced oligopoly.

How will the TLS share price react?

It seems to come down to whether or not Telstra can in fact ‘compete either way’.

Mullen’s address seems to suggest Telstra are after greater competition to the industry, but as we’ve already noted, such competition — like the TPG-Vodafone merger — puts a damper on investors’ prospects on TLS.

Undoubtedly, TLS have copped a flogging from this rollout.

And their one glimmer of hope, the T22 strategy, is ‘still closer to the start…than the finish’.

So for the short term at least, I wouldn’t expect any praiseworthy share price surges. The NPAT hit will also impact dividend amounts.

And if you’re in it for the long term, just make sure you keep an eye on any expanding competitors that could challenge Telstra’s lead.


Imogen van der Meer,
For Money Morning

PS: Comfort blue chips like Telstra don’t seem to have what it takes to maintain their well-performing dividends. Check out this free report to discover the next generation of dividend stocks that are set to be the Aussie income superstars for 2019 and beyond.

About Imogen Van Der Meer

Imogen is a research analyst at Fat Tail Investment Research, she holds an RG146 certification in securities and is currently completing a Masters Degree at the University of Melbourne. She has a particular interest in fintechs and the exciting innovations coming out of ASX-listed small caps.

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