Revamp of NBN Co ‘to hit Telstra’

Telstra shares slipped slightly after investors counted the cost of the impact of this week’s announcements from a rejuvenated NBN Co.

Credit Suisse analysts said NBN’s $3.5bn investment should have a limited impact on the retail service providers, but singled out a likely hit to Telstra’s regional monopoly.

Telstra shares slipped slightly on Thursday after investors counted the cost of the impact of this week’s announcements from a rejuvenated NBN Co, which is slashing regional wholesale pricing and embarking on a major fibre deployment.

NBN Co on Wednesday handed down its 2021-24 corporate plan, revealing it would pour $3.5bn into fibre network upgrades and $700m into wholesale price reductions, as well as $300m worth of investment into regional and remote areas.

Credit Suisse analysts said NBN’s $3.5bn investment should have a limited impact on the retail service providers, but singled out a likely hit to Telstra’s regional monopoly, and cut its target price to $3.85 a share, from $3.90. It maintained an outperform rating on the stock.

Telstra operates much of the broadband network used by regional small businesses, which are set to gain free fibre network upgrades under NBN’s plan.

“We see NBN’s plans to expand the reach of Enterprise Ethernet services to another 700,000 businesses as the biggest competitive threat to Telstra, given the expansion will likely cover areas that have previously only been served by Telstra’s fibre,” the analysts wrote.

“To take this into account, we’ve revisited our forecasts for connectivity (services) in Telstra’s data and IP segment, to now expect declines from financial year 2020 levels, with the assumption that some of Telstra’s customers will take the NBN Enterprise Ethernet product.

“While we expect some of the lost revenues will be offset by cost reductions, we’ve lowered our estimates for data and IP EBITDA by just over $100m by FY26.”

Credit Suisse analysts also noted that NBN in its new corporate plan lowered the number of expected network activations in the 2021 financial year, down to 900,000, from 1.1 million, which would lead to lower subscriber payments, including to Telstra. They said higher access costs were likely to be passed on to end users.

Goldman Sachs analysts said NBN’s plans to lower wholesale pricing across regional SMEs would hit Telstra but would probably be a boon for rival Vocus, given the increased addressable markets when partnering with NBN.

It maintained its buy rating on both telcos.

Telstra closed down 1.1 per cent at $2.84. Vocus closed down 2.5 per cent at $3.51.