Tuesday, 2 April 2013

NBN: Valuing The network.

The Coalition has rightly called for Cost Benefit Analyses (CBAs) for the NBN.
They haven't said two things:
  • What they are going to run CBAs over?
    • Will it be just their "cheaper, quicker" proposal or the current FTTP deployment as well?
  • What are they going to include in the CBA?
    • Will it be limited solely to Revenues & Income of NBN Co?
    • or will they include the value generated elsewhere in the economy.
One of the most obvious beneficiaries already of the NBN build is Telstra. I reckon Messers Conroy & Quigley should be getting Christmas cards from all Telstra Shareholders and the CEO, Mr Thodey.

ASX:TLS 12.44B shares,  Market Cap:
  • 18 Mar 2011 $2.64 = $32.84 billion
  • 22 Mar 2013 $4.53 = $56.35 billion
Increase: $23.51billion (70%), or 31% CAGR over 2 years, with no sign it will stop.

Right there in just one company, we can demonstrate value-add to the Australian economy of  almost 100% of the NBN Co project, the supposed point of interest of a Common-wealth Government, not solely it's own Balance Sheet. This well ahead of the actual expenditure.

That increase was due to factors outside the general economy and the rest of the ASX, which declined for almost all that period.

It took until January 2013 for the ASX to get back to where it was in March 2011. It has since risen ~7%.

What I can't provide you is: What would the TLS share price have been without the NBN agreements and the $11B contracts?

Looking at the previous history of the stock, it was at best going to track the market, or more likely, reach a low ($2.40?) and stagnate there because, while it was well known for giving good cash returns, it's revenue growth has been near zero for a very long time and it had no good prospects for increasing its revenue or changing its gross margin. Its revenue base was swapping away from its high-margin declining fixed-line business to the more modest returns of the competitive mobile phone market.

If you want a good reference, look at what once was one of the biggest conglomerates in Australian business: CSR Ltd. I started work for the company 40 years ago. I can remember the day the share price fell to $3.50 and one of my friends borrowed everything he could to buy shares. He figured "this is temporary" and he'd make a tidy profit. They never recovered, only done "the dead cat bounce" along the bottom as they've sold off the valuable parts of their business, one after another.

As Warren Buffet (& others) says: In the short-term the Stock Market is a voting machine, in the long-term it is a weighing machine.

The market was right to be reducing the Telstra share-price for years before the NBN definitive agreements. In the lead up to the final tranche, TLS stock traded above $4 in 2005, with a high of $5.30, well down on the T2 price of $7.40. In 2006 TLS, traded between $4.02 and $3.50. In 2007/8 it briefly explored above $4.70, before tanking post-GFC and languishing under $3 until the NBN agreements.

The Howard government team were proud of their achievement in raising almost double their target of $8B for the T3 sale. Were they proud that they put 300,000 small investors "under water" later? The Abbot team don't speak of it.

This short history of the Telstra privatisation tells a grisly tale for a whole slew of first-time small investors:
Telstra was privatized over 3 stages, which investors will recognise as being T1, T2 and T3. The privatization process began in 1997.
In 1997, investors paid $3.30 for Telstra shares. In 1999 the share price rose significantly, resulting in investors paying $7.40 in the T2 round.
In the T3 round, the Telstra share price for retail investors was much lower, at $3.60 – which represented a massive loss for T2 investors. [17-Nov-2006: $2 1st instalment, and $1.60 on 29-May-2008. In total 4.25 billion shares valued at $15.5 billion were allocated, more than the $8 billion the government expected to raise.]
We have such a significant and overwhelming impact of the NBN in just one company that it behoves the Coalition to fully explore this quantifiable value-add in its final Cost Benefit Analyses and extend it widely across the Australian business landscape, large and small.

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