The news: Optus announced that it had reached a landmark agreement with NBN Co on the migration of its Hybrid Fibre Coaxial Cable (HFC) customers to the National Broadband Network (NBN). Under the agreement, Optus will begin the progressive migration of its customers to the NBN once the network is rolled out in an area and is ready to provide services to customers currently served by Optus’ HFC network. Optus estimates the total value of the agreement as approximately A$800 million on a post tax net present value basis, with HFC customers migrated to the NBN following deployment of the network in HFC serving areas in accordance with the anticipated timetable. Payment will be received progressively on migration. Optus and NBN Co expect that the initial migration of customers to NBN infrastructure will commence in 2014.
Our thoughts: This represents a significant milestone for Singtel’s wholly-owned Optus following protracted negotiations with the government and various stakeholders over the past 12 months including the passing of two bills. In addition to levelling the playing field in Australia, the agreement with NBN provides a migratory path for Optus’ hybrid fibre co-axial (HFC) broadband customers (totalling some 425k) with the latter infrastructure eventually terminated. It also eliminates concerns that NBN, a government owned network may emerge as a direct competitor. As the NBN rollout is progressive and will take time to cover Optus’ HFC footprint, management expects the conversion to take four years, ending in 2018. The AUD800m post tax contract value is within the reported AUD500m-1bn speculated earlier, works out to some 6 cents per Singtel share.
We maintain our forecast for now pending further clarification and update from management on the extent and scope of the agreement and other costs associated with the decommissioning of its cable network. Our NEUTRAL recommendation on Singtel is maintained based on FV of SGD3.10. Optus contributes 32% of our SOP valuation on Singtel.
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