S&P has downgraded Telstra as the NBN hit reaches $3 billion

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  • S&P Global Ratings has lowered Telstra’s long and short term ratings.
  • The agency says Telstra’s strong incumbent position within the Australian telecommunications industry has “diminished”.
  • And the earnings impact of migrating to the NBN is likely to be at least $3 billion.

S&P Global Ratings has cut its ratings on Telstra, saying the dominant position of Australia’s biggest telco has diminished.

The agency says competition has intensified across Telstra’s core businesses and the company has had to accept lower margins to protect its dominant market share.

S&P lowered its long-term rating on Telstra to A- from A. The short-term rating also fell, to A-2 from A-1. However, the agency still has the outlook as stable.

“The Australian mobile market has become highly competitive,” says S&P.

“In our opinion, Telstra’s vulnerability to an erosion of its price premium and dominant market share has increased over the past few years despite elevated network investment.

“Competing mobile network operators have also made large investments in their networks and product offerings. We expect competition to further intensify with the likely entry of TPG Telecom as Australia’s fourth mobile network operator.”

Telstra shares have fallen 70% from a high of $9.07 in late 1999, hindered down by increased competition. Today they are trading at $2.84, down 1% on Friday.

The telco last month said underlying earnings in the full year would be at the lower end of its guidance range between $10.1 billion and $10.6 billion, mainly because of increased competition.

Telstra is also progressively transferring its high-margin fixed-line access network to the government-owned NBN in exchange for a series of compensation payments. The majority of this compensation is likely to be returned to shareholders.

“The establishment of the NBN will structurally separate Telstra’s fixed-line services, leaving it to compete on equal terms against a fragmented market of retail service providers,” says S&P.

The ratings agency says the earnings impact of migrating to the NBN is likely to be at least $3 billion, up from previous guidance of $2 billion to $3 billion.

“This has been exacerbated by retailers aggressively pursuing market share and onerous NBN wholesale charges,” says S&P.

“Telstra intends to fill this gap through a combination of cost savings and strategic investments.

“In our opinion, there are execution risks associated with the company’s strategic initiatives, including its vision of becoming a world-class technology company that empowers people to connect.”

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