Just like workers who want to get work out of the way before they head off on Christmas vacation, Telstra Corporation Ltd (ASX: TLS) was able to wrap up its negotiations for the national broadband network with the government and the National Broadband Network Company (NBN Co.) last week.
Looking at the deal, Telstra will get benefits which will last decades. It is handing over its physical copper network for the NBN rollout and here's what it expects to get from it.
The $11 billion will be paid over time
The figure of $11 billion in exchange for the handover of the physical copper network has been regularly reported in the news. It was the amount that the previous Labor government agreed to pay in its original negotiations. However, this is a discounted value in today's dollars since the actual payments will be made over time.
Some estimates are that Telstra could receive as much as $90 billion over 30 years. This will allow Telstra to extract value from its infrastructure asset as an extra income stream. That is good for cash flow because since 2009 the company's revenue has stayed at about $25 billion annually.
Funding overseas expansion
Also, extra revenue will be needed as Telstra expands heavily overseas. It plans to become a major player in the Asia region for business enterprise and cloud application services. The company projects that overseas business could make up around 30% of total revenue within six years. The ongoing NBN payments will help subsidise that growth for many years.
Telstra to get good share of NBN rollout work
In addition to the payments, Telstra will be assisting the NBN Co. in infrastructure development and maintenance. The NBN Co. wants to use Telstra's decades-long experience and technical know-how. Exact figures aren't known, but that will add another income stream that keeps cash flowing in.
Share movement and yield
Since early 2011, Telstra's stock has doubled from about $2.60 to $5.70. Earnings per share had been generally around $0.30, but in FY 2014 surged to $0.38. It's currently trading at 16 times earnings and the yield is a high 5.2% fully franked.
The Asia growth story may be a good business catalyst, but it's the expected NBN income streams that will drive revenue and earnings. This could be a good investment for long-term investors as the NBN payments start coming in. Also, it can help stabilise and possibly grow dividends as more funds are needed for the Asian expansion.
