Core, that $3b Telstra plan smells

ANALYSTS are questioning the value of Telstra’s surprise decision to plough an extra $3 billion into its core network infrastructure.

Morningstar analyst Brian Han said there was “much investor scepticism” about the telecom giant’s decision, although he said Telstra would face a big “earnings hole” once the NBN was fully rolled out.

“Faced with a choice of acquiring or starting significant new ventures, for example overseas or in non-core areas, versus investing in the domestic core franchise to plug this earnings hole, we would unequivocally prefer the latter,” Mr Han said in a research note.

Daniel Mueller, senior ana- lyst at Forager Funds Management, said the $3 billion figure “blew me away”.

He questioned whether it was due to underinvestment in recent years.

Telstra has been hit by seven network outages since February, damaging its reputation and angering customers.

“The smell about it is, I think they just underspent on the network in the past, and this is catch-up spend because I just can’t see how they generate an incremental return on this investment,” Mr Mueller said.

Deutsche Bank analysts Craig Wong-Pan and Peter Milliken were also “surprised” and said in a research note they remained cautious until more details were provided.

Telstra has been tight- lipped on details of the investment.

Telstra’s shares yesterday afternoon were at their lowest level since June, closing down 9¢ to $5.42 after trading steadily downwards for the past three weeks.

Telstra is already the dominant telco player, is limited in how much it can grow in mobile and broadband markets and is closely watched by the competition watchdog.

Telstra’s leadership in the broadband market is expected to come under attack following the rollout of the National Broadband Network, which is slated for completion in 2020.

The NBN will be open to all telcos, blunting Telstra’s competitive edge of having the nation’s biggest broadband network.