According to the AFR, top fund manager Lazard is investing in Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM), because the dramatic falls in their respective share prices as a result of the high wholesale cost of providing households with access to the NBN has made them compelling value investments.
The Telstra share price is down 30% over the last year whilst TPG's share price, which also declined by 30% last year, had a rally in the final quarter of 2017 and regained most of the lost value.
The NBN Co. charges retail providers like Telstra and TPG a fee to connect to the network and another fee for the maximum amount of bandwidth they want available to their customers. This is known as the Connectivity Virtual Circuit (CVC) charge.
Late last year the the NBN announced that it will double the capacity for each user connected to its network and cut the amount the retail providers will be charged for increasing this capacity. The NBN expects that the extra bandwidth capacity will mitigate congestion during peak times.
Foolish takeaway
Whilst the move to cut wholesale costs will be positive news for Telstra, TPG and Vocus Group Ltd (ASX: VOC), all three businesses have additional unique circumstances that could mitigate the impact of the wholesale pricing – TPG for example, is rolling out a mobile network.
That aside, the plans cut the wholesale prices by 10%-27% but only for the higher speed plans of 50Mbps and 100Mbps. Most customers are on the lower speed plans so the benefit to the telcos will depend on their ability to convince customers to move to the higher speed plans.
Currently, its also difficult to interpret how the telcos will respond to the price cut. Given tough competition in the sector, the telcos could all lower their retail prices and pass on the benefit to the consumers.
