It is curious that despite the uncertainty generated by the probable change of government in September, and therefore the probable change in the nature of the national broadband policy, Telstra shares are trading at their highest levels for nearly eight years, breaking above $5 in today's trade.
That says strongly that the market trusts Malcolm Turnbull and Tony Abbott when they say Telstra shareholders will be kept "whole" in a renegotiation of the deal Stephen Conroy and NBN Co negotiated with it – a deal worth at least $11 billion in net present value terms and probably more.
It may also signal that the market trusts chief executive David Thodey when he says that the value of that deal will be the bottom line in any new negotiations over Telstra’s role in the NBN, a position reiterated by Telstra’s deputy chief financial officer, Mark Hall, at the Macquarie Equities conference today.
The current NBN deal underpins the market’s confidence that Telstra can at least maintain its current 28 cents per share fully-franked dividend and, indeed, as its excess cash flows build, increase it over time.
In a yield-obsessed market environment, that helps explain why Telstra shares have performed so strongly over the past month – they essentially took off from the moment the market saw the Coalition’s NBN plan and heard its reassurances that Telstra shareholders wouldn’t lose from it.
As the market has digested that plan, moreover, it has begun to realise that Telstra may be able to actually add some value to its existing position.
A core element of Turnbull’s NBN alternative (apart from the fact that it will cost far less than Labor’s) is that he wants to use existing infrastructure where possible and promote as much competitive infrastructure as possible.
It was always peculiar that under Conroy's broadband plan, to ensure NBN Co was a monopoly, perfectly useable infrastructure was going to be either decommissioned or prevented from competing – and taxpayers were going to pay Telstra and Optus the best part of $1.5 billion for making their hybrid fibre coaxial networks redundant for broadband use.
Under the Turnbull plan the Telstra HFC network, which passes about 2.6 million premises, would be the key competitive infrastructure in metropolitan markets. Indeed, with Turnbull prioritising rural and regional areas in his version of the NBN rollout, initially the Telstra network would be the main provider of higher-speed broadband in the capital cities until the fibre-to-the-node network rollout reached them.
Optus, with more limited coverage (about 1.4 million premises passed) and technology that would require heavy investment and re-engineering, is most unlikely to want to give back the $800 million it received for decommissioning its HFC network. So Telstra’s HFC network will become even more strategic under the Coalition plan.
That network has been upgraded in recent years, using the data over cable service interface specification 3.0 standard, to deliver broadband speeds of up to 100 Megabits per second.
A report issued this week by Goldman Sachs analysts Raymond Tong and Christian Guerra says Telstra has indicated that with further upgrades it could deliver speeds of up to 200 Mbps. They also believe that during the recent upgrades Telstra increased its capacity through a greater number of 'head ends' or distribution points, and by node-splitting. That would address some of the concerns about congestion on the network slowing speeds and there is, they say, potential to further improve the network with additional investment.
The Coalition plan offers Telstra the prospect of some options for its HFC, with its base case the status quo. Another outcome might be where it retains ownership of the network but offers retail service providers regulated access to it, which would effectively make it an eventual wholesale competitor to NBN Co. It could also, of course, hand over an operational HFC network to NBN Co.
The Goldman Sachs analysts estimate that if the Coalition plan is pursued and Telstra maintains its existing HFC broadband market share of about 20 per cent within the network’s footprint, the group would add about $400 million of value. (Telstra’s copper network has a share approaching 60 per cent within the HFC footprint, and Optus’ HFC network about 23 per cent).
If Telstra could lift its HFC network share to 50 per cent (achievable if Optus’ network is decommissioned), it would add another $1.2 billion, with a further $2.2 billion of extra value in the unlikely event that it achieved 100 per cent market share within the network’s footprint.
While there would be some pluses and minuses for Telstra if the Coalition plan were implemented – there would be changes to the timing and size of the cash flows it would have received for decommissioning copper and being paid for access to its infrastructure under the current NBN rollout – the promise by the Coalition that it will receive at least the same amount of value overall and the potential for some upside provides a level of reassurance for Telstra and its shareholders that is now being capitalised into its share price.