Telstra's NBN 'wow factor'

The NBN has been the best thing to ever happen to Telstra and given the overwhelming impact of it on just one company, will the Coalition explore the quantifiable value-add of the NBN in its final cost benefit analyses?

The Coalition has rightly called for cost benefit analyses (CBAs) for the NBN, but in doing so they have failed to mention two critical aspects.

Firstly, what are they going to run the CBAs over? Will it be just their "cheaper, quicker" proposal or the current FTTP deployment as well?

Then we need to consider just what are they going to include in the CBA? Will it be limited solely to revenues and income of NBN Co or will they include the value generated elsewhere in the economy?

One of the obvious beneficiaries of the NBN build is Telstra. Communications Minister Stephen Conroy & NBN Co boss Mike Quigley should be receiving Christmas cards from all Telstra Shareholders and the CEO David Thodey.

Telstra’s market cap on March 2011 was $32.8 billion with the share price at $2.64. Fast forward to March 2013 and the numbers look a whole lot brighter, with Telstra now boasting a market cap of $55.8 billion and the share price steady at $4.52. That’s an increase of $23 billion (70 per cent) or 31 per cent compound annual growth rate (CAGR) over two years, with no sign of things slowing down.

Right there in just one company, we can demonstrate the value-add to the Australian economy of the NBN Co project.

So what would the Telstra share price look like without the NBN agreements and the $11 billion contract?

Looking at the previous history of the stock, it was at best going to track the market, or more likely, reach a low (possibly $2.40) and stagnate there. While Telstra was well known for giving good cash returns, its revenue growth had been negligible for a very long time and it had no good prospects for increasing its revenue or changing its gross margin. Its revenue base was swapping away from its high-margin declining fixed-line business to the more modest returns of the competitive mobile phone market. Of course, Vodafone Hutchinson Australia’s pain has been Telstra’s gain in the mobile market; however, the NBN still lies at the heart of the telco’s revival.

Without it Telstra was always going to sit in the doldrums, see its fixed-line business wither away and leave a lot of shareholders disappointed. A good example of this scenario is how things have panned out for one of Australia’s biggest conglomerates, CSR Limited.

I started work for the company 40 years ago. I can remember the day the share price fell to $3.50 and one of my friends borrowed everything he could to buy shares. He figured "this is temporary" and he'd make a tidy profit. They never recovered, have only done "the dead cat bounce" along the bottom as they've sold off the valuable parts of their business, one after another.

As Warren Buffet loves to point out from time to time, in the short-term the stock market is a voting machine, in the long-term it is a weighing machine. That adage has never been truer than in the case of Telstra.

The market was right in reducing Telstra’s share-price for years before the NBN definitive agreements. In the lead up to the final tranche, Telstra stock traded above $4 in 2005, with a high of $5.30, well below the T2 price of $7.40. In 2006, Telstra traded between $4.02 and $3.50. In 2007/8 it briefly ticked up above $4.70, before tanking post-GFC and languishing near the $3 mark until the NBN agreements.

The Howard government was proud of its achievement in raising almost double their target of $8 billion for the T3 sale. One wonders if it was equally proud of the fact it put 300,000 small investors "underwater" later. Tony Abbot’s team doesn't speak of it much.

This short history of the Telstra privatisation tells a grisly tale for a whole slew of first-time small investors:

Telstra was privatised over three stages, which investors will recognise as being T1, T2 and T3. The privatisation process began in 1997 with investors paying $3.30 for Telstra shares. In 1999, the share price rose significantly, resulting in investors paying $7.40 in the T2 round. In the T3 round, the Telstra share price for retail investors was much lower, at $3.60 – which represented a massive loss for T2 investors. In total 4.25 billion shares valued at $15.5 billion were allocated in the T3 round, more than the $8 billion the government expected to raise.

When we have such a significant and overwhelming impact of the NBN on just one company, it’s only natural to expect the Coalition to fully explore this quantifiable value-add in its final cost benefit analyses and extend it widely across the Australian business landscape, large and small.

This is an edited version of a blog post originally published on November 26. Steve Jenkin has spent 40 years in ICT in wide variety roles including large and small software projects, 7 years writing real-time Exchange software in a Telco and Admin, Software and Database work on PC's Unix/Open Source software and mainframes.

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