Telstra’s NBN contract under analyst spotlight

Telstra is to provide the NBN with access to Telstra infrastructure over a minimum 35-year period, expiring in 2048.

Fresh on the back of Telstra’s half-year result last week, analysts at Morgan Stanley have seized on the comments from chief executive Vicki Brady about asset sales.

While expectations are that Telstra will sell a stake in its InfraCo unit (investment bank Barrenjoey is already understood to be on standby for Telstra should it take up this option), the company indicated to analysts during the results last week that individual assets could be monetised.

Morgan Stanley analysts have earlier raised the prospect of the sale or the securitisation of the 25-year contract that Telstra has with the NBN, under which Telstra receives $1bn of cash annually.

“It’s a valuable earnings contributor for Telstra, but our analysis shows that it could be worth more in the hands (in part or full) of another investor.”

The NBN recurring receipts arise from a deal signed in 2011 between the government and Telstra for the NBN to rent infrastructure from Telstra and pay for the disconnection and migration of customers to assist with the NBN’s rollout.

The deal involved making payments to Telstra as it progressively disconnects customers from its legacy copper fixed-line network and broadband customers from its HFC network and then migrates the customers to NBN.

The analysts estimate that the NBN payments contribute 10 to 15 per cent of Telstra’s total earnings before interest, tax, depreciation and amortisation, and represent greater than 50 per cent of InfraCo EBITDA.

Morgan Stanley said they did not believe InfraCo Fixed is fully reflected in the Telstra share price and recently lifted its value estimate to between $28bn and $31bn.

“We don’t believe Telstra feels pressure to undertake a sale in part or full of the InfraCo Fixed business. These are high quality, cash-generating assets, with a positive structural outlook.

“But we do think there could be a price at which it could make strategic sense for Telstra just to monetise in part or full the NBN receipts and keep ownership of the other InfraCo Fixed assets and infrastructure.”

Morgan Stanley said such a scenario would bring cash to Telstra for investment, dividends or buybacks, while also maintaining asset ownership and supporting a higher multiple.

Based on a weighted average cost of capital of 5.5 per cent for government-related risk, Morgan Stanley places a value of between $13bn to $23bn on the assets through discounted cash flow, including a terminal value at the high end of the range, assuming a contract term extension beyond 2048, equating to between 15 and 25 times earnings before interest, tax, depreciation and amortisation.

Morgan Stanley estimates that if they were sold, Telstra would trade at about a 30 per cent discount to the average price of their global peers of about 7.8 times.

Telstra is to provide the NBN with access to Telstra infrastructure over a minimum 35-year period, expiring in 2048.

The infrastructure involves underground ducts and pits through which the NBN fibre will run, dark fibre that NBN Co can use for backhaul purposes and rack spaces in Telstra exchanges.