Telstra shareholders can now smell money

If ever there was a company whose sum of the parts exceeded the whole – Telstra would be it.

The prospect of the telco giant separating its valuable infrastructure assets from its core business, and the likelihood it would reward shareholders with some kind of capital return set the pulses racing and the share price running on Thursday.

The value of the infrastructure assets locked inside Telstra and not properly reflected in its share price is potentially huge. But on the road to (value) recognition Telstra will need to navigate potholes and detours. It will take time.

A tower that now services only Telstra could service all three mobile networks.
A tower that now services only Telstra could service all three mobile networks.Credit:Rob Homer

The larger of Telstra’s infrastructure businesses, which has been given a working title within Telstra of Infraco Fixed, has been valued by one major investment banker at up to $34 billion compared with a value in Telstra’s books of around $9 billion. It holds the company’s ducts, fibre, data centres, subsea cables and exchanges.


It is now operating as a standalone business within Telstra – and is being ripened up for anything from an outright sale to a spin off or a demerger.

Dealing with this asset sits somewhere between a thought bubble and a done deal. This is the business that could potentially buy or take a stake in the National Broadband Network – in the event that the government sells it some five years down the track.

Andy Penn understands the rewards are rich if he pulls off this corporate overhaul.

How Telstra ultimately deals with Infraco Fixed will need to take into account the potential for it to buy or control NBN. So it will need to be fairly comprehensively structurally separated from the rump of Telstra – the business that sells mobile and broadband to consumers and businesses.

It will also need to get buy-in from the Government and the NBN as well as regulators and potentially investors.

It’s a complicated process. Having said that Telstra boss Andy Penn understands the rewards are rich if he pulls off this corporate overhaul.

There are different ways to do it. For example Telstra doesn’t need to sell Infraco Fixed as a whole business. There are assets within it that could be shaved off and sold separately.

In the meantime Telstra is further down the track on doing something with its smaller infrastructure business that owns its mobile towers.

Dubbed InfraCo Towers, it a somewhat smaller hidden gem – but it still has an estimated worth as much as $4.5 billion – once again it is held in Telstra’s books at a fraction of that value.

In theory selling down this asset should be less complicated from a regulatory standpoint. But it is most likely that Telstra will probably list this Infraco Tower business by selling a smallish stake to outside investors.

The idea is that once listed infraco tower’s valuation will be more generously reflected in Telstra’s share price. The curious aspect to the tower business is that its growth will rely in part on attracting other mobile phone operators to use these assets. Sharing infrastructure nicely with competitors is not something Telstra is known for.

The sell down also coincides with plans by rival Optus to sell its mobile towers. Optus owns fewer towers but has cherry-picked better sites in its portfolio.

Nothing will happen until the end of next year, so Thursday’s announcement provided a bit more detail about where Telstra’s strategic roadmap is heading.

But it was enough to focus the minds of investors.

And that wasn’t the only good news for long suffering Telstra shareholders who have for years endured the financial headwinds created by the NBN. Based on updated expectations, the back half of the 2021 year will see underlying earnings begin to pick up – albeit the full year profits will still be down.

Telstra CEO Any Penn gives sneak preview of Telstra 2.0
Telstra CEO Any Penn gives sneak preview of Telstra 2.0

Management is clearly now sufficiently confident that the various strategies it is employing to return to profit growth will be successful. The growth garnered from its lead in 5G is part of this, an improved margin on its fixed broadband business will help and enhanced average revenue per user is another part.

Reaching its profit targets this year and out to 2023 will also rely heavily on reaching heavy cost reduction objectives.

Telstra’s ambition is to move from its 2021 financial year guidance for profit before interest tax depreciation and amortisation of between $6.5 to $7 billion to get to ebitda of $7.5 billion to $8.5 billion in financial year 2023. This would deliver it the magic 8 per cent target for return on invested capital.

And more importantly for shareholders it would underwrite Telstra’s ability to retain dividends at the current level.

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