Telstra expects $3 billion NBN hit

Impact of NBN at higher end of previously forecast range, Telstra CEO says

Telstra CEO Andrew Penn

Telstra CEO Andrew Penn

Telstra’s CEO Andrew Penn said today that the telco believes the hit to its earnings before interest, tax, depreciation and amortisation (EBITDA from the National Broadband Network will be at the higher end of its previous forecasts.

Telstra said in May last year that it expected the NBN to have a negative effect on ongoing EBITDA in the region of $2 billion to $3 billion.

“Our view is given the latest outlook of NBN CVC charges, which we estimate will more than double over the coming years, we now expect the impact is likely to be at the top of this range; in other words, around $3 billion” Penn said today during a briefing on Telstra’s full year results.

CVC — or Connectivity Virtual Circuit — is one of the major charges levied on retail service providers (RSPs) such as Telstra that sell services on the NBN.

The NBN rollout “essentially represents the re-nationalisation of a material part of our business” and will have a significant impact across the telco sector, Penn said.

As of 30 June, Telstra held 52 per cent of the NBN retail market, excluding satellite connections. During the year the company added 676,000 NBN customers for a total of 1,176,000. NBN CEO Bill Morrow recently argued that RSPs have been slashing the prices of their NBN plans as part of a “land grab” strategy seeking to build market share.

Penn said that Telstra’s NBN market share has not been built through significant price reductions.

“The pricing on our core plans remain unchanged over the last 12 months although there is no doubt the competition has increased and we have enhanced the value in each of these plans,” the CEO said.

Penn outlined details of the potential monetisation of the receipts from NBN’s access to its infrastructure including fibre, exchanges and ducts. These ongoing payments are expected to reach around $1 billion a year by the end of the NBN migration process.

“It is the infrastructure access receipts that we are seeking to potentially monetise and this where we’re updating the market today,” Penn said. “And by monetise what we essentially mean is bringing them forward from a cash perspective.”

“If we were to proceed with these plans, it would involve approximately 40 per cent of the total receipts that are ultimately expected,” the CEO said. “This represents the already locked-in receipts for the fibre and exchanges.”

The transaction would be worth around $5 billion to $5.5 billion with the telco to retain some equity interest.

“If the transaction proceeds, our intention would be to use the proceeds to reduce debt by about $1 billion, with the balance to support capital management to enhance shareholder returns,” the Telstra chief executive said.

The transaction would be subject to approval and consent from a number of parties including investors, the federal government and NBN. Penn said Telstra is currently engaging in discussions about the proposal.

Telstra’s net profit after tax dropped 33.8 per cent due to last year’s sale of Autohome; however NPAT from continuing operations grew 1.1 per cent to $3.9 billion. Revenue from continuing operations was $26.01 billion up 0.4 per cent from $25.91 billion.

Total income on a reported and guidance basis was up 4.3 per cent to $28.2 billion. Telstra’s EBITDA was up 2 per cent to $10.7 billion on a reported basis and up 4.5 per cent to $11.2 billion on a guidance basis.

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