I wrote a few months ago in The Australian that the Government would eventually have to write down the value of the NBN by $20 billion or so to $10 billion, and then sell it.
The return on capital of 3% might be OK for a Government pursuing social aims, but obviously wouldn’t work for a private owner, so no one is going to pay more than $10 billion for it and the Government is desperate to sell it.
As Paul Keating might say, the pet shop galahs are now talking about a write-down.
I thought then, and still think, that the obvious buyer would be Telstra, but the humiliation of that might be too great for the bureaucratic establishment, led by the ACCC, that wanted to use the NBN to destroy Telstra’s monopoly (just as News Corp refused to sell Eureka Report back to me in 2015, and ended up selling it for less to Investsmart).
The NBN did destroy Telstra’s monopoly, of course, although perhaps not as completely as the ACCC had hoped, and replacing it with a Government monopoly has proved – surprise, surprise! – politically disastrous. It’s a mess.
David Tudehope of Macquarie Telecom Group told me in yesterday’s Talking Finance podcast that the complaints and problems are only going to get worse from here, so it could actually determine who wins the next election, although both sides are legitimately blaming each other for the mess and confusing the hell out of everybody.
So what kind of investment theme does this make telecoms, leaving aside the particular circumstances of each company?
Broadly, the high cost of the NBN is compressing margins across the industry. The big four – Telstra, Optus, TPG and Vocus – have got more control than the smaller RSPs (retail service providers) but they’re copping it as well.
There probably will come a time when the whole thing will bottom out and start improving, but not for a while. The nadir of Australia’s broadband debacle might be seen only in retrospect, but that’s better than getting in too early I suspect.
Vocus is unloading assets to reduce debt, but still doesn’t look cheap enough on a PE of 13.7 times even though the price has fallen from $9 to less than $3.
TPG is simply a bet on the mobile network it’s building. It’s probably going to make good money in the long term, but for a couple of years margin compression from the NBN is going to weigh on the price.
As for Telstra, it’s been a shocking investment for most of the past 20 years, ever since it was floated, and I can’t see that changing – unless it picks up the NBN on the cheap. But that won’t happen.