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[Snoopy]

Number two on the investment list is the vast inter capital ultra fast (400Gbps) fibre super highway that Telstra is building between Adelaide, Melbourne, Canberra, Sydney and Brisbane. Apparently customers 'Amazon AWS' and 'Microsoft Azure' hyper data providers are excited. Telstra seems excited, as this is apparently the first such upgrade for twenty years. But do you forgive me as a Telstra shareholder for being less than excited? Somehow I can't see Amazon or Microsoft bubbling over to pay Telstra a great return on this investment we are making. Nevertheless I believe that connecting those capital cities in this way and reaping the rewards, whatever they may be, was a prime reason why InfrCo was retained within Telstra, and not sold off. Growth is not expected from this investment until FY2026, when the whole upgraded capital city inter-connectedness comes on line.

How much is this inter-capital super cyber highway going to cost? PR2023 p7 suggests an annual spend of $300m will cover the build out of intercity fibre and Viasat development projects (Viasat spending from a Telstra perspective represents the 'Australian based ground stations' for an Asia Pacific satellite constellation - Telstra has no equity interest in the Viasat satellites themselves). Let's assume 90% of this budgeted spend over 3 years is towards the UFB FSH. That comes out as an investment of: 0.9 x 3 x $300m = $810m. The InfraCo EBITDA margin was listed at 66.1% over FY2023 (AR2023 p23). That would imply an annual EBITDA contribution of: $810m x 0.661 = $535m from this investment. Let's say half of that in reality - $220m - as I am sure those US based big boys will screw Telstra down on price. Total Telstra EBITDA for FY2023 was $7,862m. So we are looking at a $220m/$7,862m= a 2.8% rise in EBITDA. Useful. But I can't get too excited about that,

Questions answered on this topic from the analyst HY2024 conference call:


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Q1/ Roger Samuel/ There has been a lot of press around new investment in subsea cable systems. The first part of the question is can you tell us what sort of rate of return do you expect from these investments? And whether you need to upgrade the older cable systems that you’ve got? And you may require some more strategic capex investments on top of your intercity fibre network?

A1a/ Vicki Brady (CEO)/ In capex, and you mentioned undersea cable investments. I mean, it's a little bit like what we’re seeing here in Australia in terms of the build-out of our intercity fibre, as we look at demand and future demand there is a lot of demand for capacity on undersea cable. And as I spoke to, we’re a significant player in APAC (Asia Pacific) when it comes to our undersea cable business.

So we assess any of those investments and have hurdle rates in place that those investments have to reach. Michael may want to comment a little bit more on that. And at the moment we’re managing that obviously inside our capex envelopes. As we look at next year and beyond, that’s one of the things we’ll work through. Because if we see good opportunities to invest where there can be good returns, as we did with intercity fibre, in that case we could see the benefit. We could see the benefit in moving quickly to build that capacity, to set the country up for the next couple of decades.

So in terms of undersea cable there are some similar structural trends there in terms of that growth in demand. And as you’ve seen, we do partner and we do look at different arrangements to be able to make sure we can meet the needs of our customers. Just in terms of our older subsea cable systems, we have every year an amount of maintenance and upgrade spend for those systems just like you would do on a fixed infrastructure. In terms of fibre you do 'do maintenance', you do 'do upgrades' to electronics to make sure you’ve got capacity growing to be able to meet the needs of our customers. So that’s the ordinary course and that sits inside our business-as-usual capex.

A1b/ Michael Ackland (CFO)/ "I think just on the subsea business, those same trends that are driving the demand for intercity fibre are driving demand in subsea. And as we talked about earlier this year, we have invested in an additional around $100 million in new growth investment as part of our BAU (Business as Usual) capex, as Vicki pointed out. One of those is a new Singapore/US route, which will come online in Q3 this year for customers ready for service, and a Taiwan/Korea route that’ll come online into Q4. And in terms of how we think about those investments, we do look at them in a similar way as we would with intercity fibre."

"We’ve always talked about cash and IRRs, and hurdle rates. And we’ll have a risk adjusted view of that, which will be different risks for different routes, and in the same way as we look at intercity fibre. So we think there is a lot of opportunity there, and we are incredibly well positioned in very specific routes, particularly intra-Asia for us, and trans-Pacific."



Q2/ Ware Kuo/ "In relation to InfraCo and intercity fibre, and you’ve called out increased confidence around the IRRs from the project. Is there any risk of potential fibre overbuild for long haul that we see in residential, and if there is, how do you mitigate against that risk?"

A2/ Brendon Riley (CEO, Telstra InfraCo) / "I was in the US just a few weeks ago at the PTC (Pacific Telecom's Council conference), which is probably the biggest digital infrastructure event in the world. And coming out of that, one can only be very excited about what’s happening in the world of digital infrastructure, the investment, data centres, satellites, terrestrial undersea fibre. If you look at it all, then it just instills a huge amount of confidence in the project. And I think we came away from that with a great deal of renewed interest in the wonderful intercity fibre that we’re laying."

"If we look at the Australian market, I would describe it as that backhaul and the access market. The backhaul market is essentially what inner-city fibre is, it’s those big links between capital cities, between data centres, between major nbn POIs. And access fibre is obviously what connects to our homes and our businesses (includes mostly fibre run by nbn)."

"There’s definitely a lot more activity in access fibre, in terms of numbers of operators and builders. We still see very good demand for our access fibre, not only from Telstra but the rest of the industry. But there’s probably more action in that access fibre space than there is in the backhaul space which is where we’re building intercity fibre."

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I note from the HY2024 results presentation that 'core access' revenue to 'InfraCo Fixed' was up 8.2% on the corresponding previous half year period HY2023, while 'InfraCo Fixed' expenses rose 17.1% over that same period. This is one sign of InfraCo being in an 'investment phase'. Another being EBITDA only rising 3.3% concomitantly. InfraCo is the infrastructure owning arm of Telstra that doesn't own the cellphone towers (that is a separate business, Amplitel). InfraCo assets are wholesale back-haul assets like the inter city fibre highway being discussed. But also more prosaically, ducts (many rented on long term 24 year contracts to nbn, the national broadband network), and racks for housing hardware and software for others. Much of this income is long term rental contracts that have an inflation linked element. Infrastructure investment like this involves dollars up front before the income streams really kick in. So I think the best is yet too come for InfraCo which may be why, unlike what happened to Amplitel, Telstra has no immediate plans to sell down their 100% InfraCo holding.

One growth area of Infraco between reporting periods is the disposal of legacy copper assets as the old Telstra owned copper network is recycled, as the national asset restructuring plan transition to nbn fibre rolls through. Nevertheless despite a fall of 2.5% against the prior reference period, EBITDAaL (Earnings before interest, tax, depreciation and amortisation and after leases) margin for InfraCo fixed remains healthy at 60.2%. In my view, this part of the Telstra growth engine is still in the building phase and has yet to show its potential. But the outlook remains very promising.

SNOOPY