Telstra trims profit forecasts because of NBN slowdown

Telstra shares jumped despite it being forced to cut 2019 earnings forecasts because of a slower than expected NBN rollout.

Telstra CEO Andy Penn. Pic: Aaron Francis

Telstra shares have jumped over 3 per cent despite the incumbent telco trimming its 2019 full year numbers on the back of a slowdown in the rollout of the National Broadband Network, with the market ignoring the minor adjustment and instead focusing on the upside of the delay.

Telstra (TLS) shares ended the session on Thursday up 3.31 per cent to $3.12 it said that the slowdown in the NBN rollout will see a $300 million reduction in its total income for FY2019, from a range of $26.5 billion and $28.4bn to $26.2bn and $28.1bn.

Meanwhile, earnings before interest, taxes, depreciation, and amortization (EBITDA) for the period has been downgraded by $100m, from a range of $8.8bn and $9.5bn to $8.7bn to $9.4bn.

NBN Co’s latest corporate plan, released last week, shows that it will connect less homes to the NBN than previously forecast, as it looks to make up ground lost because of the suspension of services on the hybrid coaxial fibre (HFC) portion of the NBN.

Telstra receives payments from NBN Co for every home that moves from its wholesale network to the NBN.

While the next 12 months will see Telstra receive less in compensation payments, Macquarie analysts said that the overall impact on Telstra’s books should be minimal.

“While Telstra will receive some of its NBN one-off payments later, this is offset by being able to sweat its high margin copper assets for longer and also by retaining wholesale customers for longer,” Macquarie said.

Telstra said in a statement to the market that the long-term implications of the delay were “financially positive”.

“The effect of deferring per subscriber address amount (PSAA) receipts from NBN Co in FY19 into future periods … will be partly offset by the natural hedge including benefits from lower NBN costs to connect (C2C), lower network payments to NBN and retained wholesale EBITDA,” the telco said.

“While the lower volumes impact Telstra’s outlook for FY19, it is anticipated these changes will be financially positive to Telstra over the full rollout due to the effects of the natural hedge.”

Telstra’s move to trim its guidance is not entirely unexpected given that NBN Co has had to slow down the network rollout to address service quality issues. NBN Co had forecast 6.9 million activations at the end of 2019 financial year. However, that number has now been cut to 5.5 million.

The shortfall of 1.4 million service activations means that Telstra pockets less compensation but it also allows the telco to hold on to its wholesale customer base a little longer.

The main culprit for NBN Co’s wobble and the resultant downgrade in Telstra’s earnings is the HFC suspension, which ran from last November to June this year. However, with HFC services back online and the access technology set to account for the majority of service activations over the next two years, NBN Co is aiming for a big ramp up in the rollout in 2020 financial year.

NBN Co is forecasting two million activations and $2.6bn of subscriber payments in FY20, which UBS analysts said should also see Telstra make up for the payments lost in FY19.

“If NBN Co executes, this also suggests a material step up in Telstra’s FY20 disconnection payments,” they said.