Looming NBN earnings gap gives Telstra the jitters

A joint venture with The Philippines’ San Miguel has fallen through.

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Telstra boss Andy Penn sits in control of 65 per cent of the country’s telecommunications business but the market is getting worried about the company’s coming earnings gap as the NBN rolls into town.

This explains why despite initial relief that the proposed Philippines joint venture with San Miguel fell over, in the longer term there will be worry over earnings.

The market is forgetting that the company negotiated an extra­ordinary $98 billion compensation plan from the federal taxpayer which, in the words of previous boss David Thodey, left the company in the same position as it was pre-NBN.

Penn has flagged the lower margins the company is earning now that NBN is taking over its fixed-line business but this plays down the extent of the taxpayer subsidy.

Penn does have a growth problem: sales on Deutsche Bank numbers are tipped to grow just 3 per cent from $25.8bn this year to $26.7bn next year.

Net profit over the period will grow by 10 per cent, from $4.2bn to $4.6bn.

The company is a solid earner and generates $4.6bn in free cash flow each year before considering the close to $100bn coming from the federal government, according to a report prepared for the government by Credit Suisse.

But this is short of the double-digit growth rates recorded last decade.

The market concern is shown by the fact the stock, even after yesterday’s bounce, is at the low end of its 52-week range of between $4.98 and $6.43 a share.

The Philippines joint venture was a key plank in the growth ­options Penn was building and he expressed his strong disappointment in the failure of the talks yesterday.

So confident was Penn in the deal that he has had Telstra people on the job acting as in-house ­advisers to the San Miguel team as it built out its 700 megahertz spectrum phone business.

There was a team of more than 50 people in The Philippines and Australia working on the deal for more than 12 months.

Earlier this month Penn, in conversations with analysts, expressed some frustration that the deal was taking longer than he had hoped and finally this frustration gave way to pulling out of the deal at the weekend.

San Miguel boss Ramon Ang said that Telstra offered to continue to provide consultancy services but made no comment as to whether he would accept the chance.

Maybe he had learned enough.

Just why the talks broke down is not known, but clearly San ­Miguel wasn’t offering Telstra much for its planned $1bn investment and the company rightly decided to take its bat and ball home.

Telstra has had a long experience in The Philippines, where a lot of its outsourced call centre and other services are based, so it was considered a logical step to enter the mobile market.

The incumbents did their best to dissuade Telstra with threats of legal actions and other games, which Telstra knows well from its Australian experience.

The public comments from both sides indicate the talks ended amicably enough; it’s just that Telstra wasn’t going to earn enough to justify its time and money.

It is far better to walk than do a bad deal, but this still leaves the question: where is the growth coming from?

Penn will win plaudits from the nervous nellies who will read capital discipline written from the ­decision as they worried that the company was taking a walk on the wild side and would blow its money.

There is a section of the Australian market that would prefer companies to exploit San Miguel, a newcomer to the telco game, which is now pressing on as a sole provider, trying to shake up the cosy duopoly including SingTel now providing mobile services in The Philippines.

Telstra earns 10 per cent of its revenues from Asia and, while ­former boss David Thodey was on record targeting double this amount, Penn is reluctant to put a stake in the ground.

Brownfield development deals like this one don’t come up too often in Asia, which explains Penn’s disappointment.

He is pinning his hopes that the switch from mobile voice and SMS services to data services will shake out the market and give Telstra some growth.

Here, customer offerings will move from virtually unlimited calls and SMS services to data charges and this will be a whole new ball game.

Penn argues the growth in so-called over-the-top services will drastically change the mobile market for incumbents and Telstra’s expertise will open some doors.

The network services joint venture in Indonesia is going well. Telstra is providing expert ­trouble-shooting services to pinpoint network problems that shut down branch networks.

This managed network ser­vices offering has no shortage of demand and allows companies to find problem areas within minutes rather than days.

Given some recent snafus, some Telstra customers may want some of that treatment at home.

No hurry on report

In early December the federal government received the report from its Capability Review team on ASIC but the independent review has not been released.

The timetable in Canberra has changed somewhat, so that what used to be said as coming out pre-budget now is coming out pre-election, whenever that is.

The Capability Review release date was originally to be packaged with a decision on ASIC self-funding and of course a decision on who will be the next boss.

Incumbent Greg Medcraft is looking for another two years but subject to headhunters Heidrick & Struggles coming up with a suitable replacement, that was always doubtful.

Just how the head-hunter is travelling is not known.

The Capability Report is not a ringing endorsement of the Medcraft reign and is not recommending self-funding until some sort of overhaul of the corporate plod.

All of which is a somewhat­ ­bizarre backdrop to the present flurry of action from the plod with law suits against the big banks and enforceable undertakings being rewritten for Macquarie Group.

Some action from Canberra would provide some credibility.

Hands off section 46

All going to plan, federal cabinet will today consider changes to the proposed competition law section 46 (misuse of power), which are aimed at giving small business something but to not put the fear of the lord into big business champions like Wesfarmers’ Richard Goyder.

A decision is promised this time by the end of this month.

The Business Council of Australia doesn’t want any changes to section 46 because it would rather keep the law impotent.

This is the trouble with Chris Bowen’s plan to help fund small business legal action because while it may get small business to court, once there the law will be applied.

And if it’s a dumb law, all the funding in the world won’t help get the right answer. Bowen is opposed to any change to section 46, which is being pushed by small business.

$450m Qubed

Today should also finally see details of the proposed $450 million-odd rights issue from Qube to help pay off its 50 per cent share of the Patrick port business it is buying with Brookfield and friends.

Canadian Pension Plan is also making a $300m equity injection into Qube, which will complete a $750m equity raising.

A consortium of seven investors will be taking control of Asciano’s Pacific National rail business.