Our largest telco is banking on a clash with the national broadband network operator (NBN Co) to turn around its financial fortunes.
While the Telstra Corporation Ltd (ASX: TLS) share price has strongly outperformed the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index over the past year, it’s been struggling to break above the $4 mark – a level not reached in around two years.
But I think the stock needs a new catalyst to take it over the psychologically important milestone as it’ looking fully-priced at current levels, in my view.
This catalyst could come from a cut to the wholesale NBN price – if Telstra’s CEO Andy Penn got his way.
The next Telstra share price re-rating
Penn is pushing the network operator to slash the average wholesale price by nearly $20 to $35 a month, according to the Australian Financial Review.
NBN Co’s boss Stephen Rue is unimpressed and has hit back by pointing out that Penn’s call is self-serving and that NBN Co pays Telstra billions of dollars for the right to use the Telstra pits to lay cables.
A material reduction in the wholesale price would trigger a further re-rating in the Telstra share price as that would bring big benefits to Telstra and its shareholders.
Other telecommunications groups that sell NBN services like TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC) would benefit too but not as much as Telstra given that it accounts for around 50% of NBN customers.
These retailers complain that they make no profit from selling the NBN as wholesale prices are too high and there’s a limit to what households are willing to pay.
From a re-rating to de-rating risk
Further, Telstra warns that wholesale prices are going to rise soon due to the Connectivity Virtual Circuit (CVC) fee on bandwidth that comes on top of its base charge. Bandwidth demand is surging thanks to the popularity of data-hungry apps like Netflix.
Telstra is predicting that the wholesale price for the popular 50 megabit per second broadband plan will increase to between $52 and $55 from $45 a month.
If this comes to pass, Telstra’s share price will likely tumble from current levels unless it can fully pass on the price increase (which may be difficult in my view).
However, NBN Co is unwilling to discount pricing as it’s already struggling to turn a buck. The federal government will also have to make a big write-down in the value of the asset under that scenario, which will be politically embarrassing for the Coalition as the NBN was built under their watch.
On the other hand, I am not sure if the federal LNP can avoid this – particularly if consumer broadband prices rise by around 20% as Telstra is predicting. The NBN price could become a political hot potato just as electricity prices have been a hot-button issue with voters.
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The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.