"We maintain our buy on Telstra and expect to see good income and growth in the medium term."
Last week the Communications Minister, Senator Conroy, said the Government was prepared to do “whatever it takes” to get the fiber to the node network built.
He said the High Court ruling on access would support this but expert legal advice suggests separation and possibly sub-loop unbundling would lead to compensation under s51 (xxxi) of the Constitution.
Our summary review of legislation and regulation suggests there are at least 11 major changes facing the Government. Some of these are open to constitutional challenge and some may be disruptive to the industry.
Lets not forget that in the 1980s, the Government committed A$1.0bn to finance Aussat for strikingly similar reasons to get the fiber to the node network. It lost the lot despite protective regulation. A Parliamentary Committee said the capital and financing costs were higher than expected, revenue growth worse than expected and that it was restricted from commercial activities (ie, key retail services).
There is at present a lot of negativity around Telstra, however we retain our long-term forecasts and our A$4.39 valuation. The company is expected to maintain their dividend at 9.46% with the loss of the fiber to the node network having little impact in the medium term (next couple of years).
Key downside risks to our target price include higher costs or capex, IT projects running over budget, further sales or earnings impact and slower mobile growth.
We maintain our buy on Telstra and expect to see good income and growth in the medium term.
PS. If you would like more detail on Telstra and our views, please give us a call... 07 4771 4577.