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With the new Federal Government’s National Broadband Network high on the agenda and pundits predicting that the insatiable use of telecommunication services is set to continue, the telecommunications sector looks likely to weather any slowing in the Australian economy more comfortably than other sectors.

Goldman Sachs JBWere states that the telco sector is more defensive than many other industries in Australia and that increased demand for wireless broadband internet access would sustain its growth over the long term.

The industry has come through a period of significantly increased competition, especially in mobile and broadband – and it’s anticipated that competitive pressure on margins will continue over the medium term.

Impending are some significant policy changes, in particular in relation to broadband.

Dominated by Telstra, the distinctly bipolar sector is teetering on the edge of emerging from ‘the dark ages’ as the Government’s $8 billion high-speed broadband fibre network gets closer to becoming a reality.

The government’s tender has yet to be awarded. The two main contenders will be Telstra, which is not enamoured with the government’s plan to invest $4.7 billion and create a joint venture and a consortium of telecommunications companies. This includes SingTel Optus, the G9 group, which has not expressed any objection to the proposed joint venture.

In an overview of the proposed regulation, telco consulting company, Ovum refers to an ACCC report, the Telecommunications market indicator report 2005-06, published in August 2007. It notes that during the 2005/2006 financial year, Telstra enjoyed a 78% share of the end-user PSTN (Public Switched Telephone Network – the worldwide voice telephone network) access line market.

The only other full-service operators with PSTN access networks are SingTel-owned Optus (with a market share of 14%), AAPT (owned by Telecom Corporation of New Zealand – TCNZ) and Primus Telecom. AAPT and Primus have a combined market share of 8%.

There are four mobile network operators in Australia:

Hutchison – 7% market share; 68% population coverage (96% with national roaming)
Telstra – 45% market share; more than 99% population coverage
Optus -32% market share; more than 96% population coverage
Vodafone – 16% market share; 92% population coverage (95% with national roaming).

(NB: the above connection market share figures are valid as of 2Q07.)

Analysts agree that revenue from fixed line telephone networks will fall but that growth in mobile services and broadband will more than offset this.

Broker Watch – how they rate the telcos

Company

ASX Code

Broker Recommendation/analyst

Share Price

Telstra

TLS

BUY – ABN Amro Morgans (Ian Martin)
BUY – Credit Suisse (Justin Cameron)

$4.57

Pipe Networks

PWK

BUY – ABN Amro Morgans (Scott Power)

$4.20

Reverse Corp

REF

BUY – AMN Amro Morgans (Scott Power)

$3.22

Amcom

AMM

BUY – ABN Amro Morgans (Ian Martin)

$0.22

SingTel Optus

SGT

HOLD – Credit Suisse (Justin Cameron)

$2.99

Telecom NZ

TEL

HOLD – Credit Suisse (Justin Cameron)

$3.49

Hutchison Telecommunications

HTA

SELL – Credit Suisse (Justin Cameron)
BUY – AMN Amro Morgans (Ian Martin)

$0.13

Telstra – BUY (Credit Suisse, ABN Amro)

“From an investor’s perspective arguably the only real focal point in telecommunications would be Telstra,” says Credit Suisse analyst, Justin Cameron pointing out that on a 12-month rolling basis relative to the Australian ASX 200 index, the telecommunications giant has out-performed by around 12%.

Telstra’s five-year IT transformation plan is running ahead of schedule but two factors have been hurting it and according to ABN Amro’s Ian Martin, led to its weaker than projected first half result.

“Firstly the Instalment Receipt which is relatively geared. You’ve got a lot of margin calls on that. This expires at the end of May so the hedge funds that have been in there previously for the gearing that it gives are now starting to unwind their positions,” he says.

“Plus with the market the way is going there’s been a lot of margin supported buying of Telstra – particularly the Instalment Receipt – and that’s also coming under pressure.”

Pipe Networks – BUY (ABN Amro)

Pipe Networks is primarily a backbone network that wholesales capacity to other operators in the industry. It operates 670,000 metres of fibre optic-based network, which is sold to larger customers – banks, government departments and services in central Sydney, Melbourne and Brisbane. This provides secure, long-term revenue.

What’s got the market excited is that Pipe has just got the go ahead to build a $200 million undersea cable between Sydney and Guam, which will mean faster, cheaper internet access for the local market.

Due for completion in mid-2009, the Pipe Pacific Cable breaks Telstra and Singapore Telecom’s stranglehold on Australia’s cable links to the rest of the world.

Ovum’s research director, David Kennedy states that there is a debate in the industry about whether this is going to create a bubble in trans-Pacific capacity.