Sunday, August 17, 2014

NBN Co already running at 500% Cost Benefit Ratio. Why the Vertigan/Ergas Review hold-up?

The Michael Vertigan and Henry Ergas "Cost Benefit Analysis" of NBN Co was announced on 12-Dec-2013 and is still yet to deliver their review.
Meanwhile, NBN Co has achieved more than 500% Cost-Benfit Ratio.

There are two problems I have with the assumptions and methodology announced:
  • Even under the dubiously recalculated figures, the IRR (Internal Rate of Return) of all versions of the NBN Co business plan is positive, albeit FTTP was 2%, down from the Quigley Business Plan of 7.1%.
    • NBN Co is not, and never has been, an expenditure-only investment.
    • The "Cost" of the CBA is zero by definition, and the resulting Cost-Benefit Ratio is infinite.
    • From the announced revised estimates, there was never a reason to run a CBA, once positive IRR's were established.
  • On the available Government Funding figures, somewhere between $5.3B and $7B has been injected as equity by the Federal Government into NBN Co.
    • There is already a directly attributable and precisely measurable economic Benefit of the NBN project: the additional increase in Market Value of listed Telecoms companies.
    • This is at least $36.5 billion,
    • for a Cost-Benefit ratio, already, in excess of 500%.
    • This is the direct benefit only to shareholders of the companies.
  • Other Identifiable Economic Benefits
    • There are considerable more identifiable and measurable components to the wider Economic Benefits of the guaranteed, selectable and dependable high access-rates of the NBN Co wholesale services.
    • The least of these is the Labour Time Cost savings of Small Business and at-home work, a value of which can be estimated from the higher average download volumes of NBN Co customers compared to the all services. Reported by the ABS as 40GB/month vs 30GB/month. A 33% increase in download volume.
    • At the average download rate of 5Mbps reported by the ABS, 10GB (80Gbits) is 4.5 hours/month saved. Even at a minimum wage rate of $16/hr, this 53hrs/year or $850/year/subscriber (household).
    • At 30-Jun-2014, NBN Co reported adding 105,000 fixed-line subscribers with 210,000 subs in all, a yearly subscriber Labour Cost benefit of $90M/yr on $5-7B, or 1.8%/year. Scaled up to the anticipated 10M subscribers, that's $9B/yr identifiable value to subscribers. Over the 30 year life of the project, this is an additional ~50% Cost-Benefit Ratio.
    • If an actual Value in Use of Time to subscribers was calculated, I suspect the figure would be closed to $150/hr, both for business and discretionary time for domestic use.
Supporting Data

According to NBN Co's 2013 Annual Report (120pp) [as the latest figures available]:
To date NBN Co has been funded by successive equity injections from the Commonwealth totalling $5.3 billion, including $2.4 billion in FY2013. (pg 113)
and "Government Funding, FY 2013: $5,229 (pg 105)"
Data from Google Finance, 16-Aug-2014.
Shares selected from "Related Companies".
Only one of the identified companies, Macquarie Telecom, lost share valuation during the period.

The period selected was from 24-Jun-2012, the date that the NBN-Telstra Definitive Agreements were signed. This was considerably after the $2.60 minimum share price reached around Dec-2011.

The calculation accounted for the impact of the increased value in the Australia stock market, calculated by the S&P ASX-200 ['XJO' to Google Finance].

Additional Financial Data is included to allow better comparisons to be made between the classes of business (high P/E ratios for high-growth companies, low P/E for mature companies).

Table 1. Growth of ASX Telecomms Stocks 24-Jun-11, Aug-2014
TickerCompany nameIncreaseStartASX AdjustedNBN ContribExtra Mkt Cap ($M)Shares (M)Price
XJOS&P/ASX 20020.42%5,566.50
TLSTelstra Corporation Ltd86.98%$2.98$3.59$1.99$24,18112,173.84$5.58
SGTSingapore Telecommunications Ltd41.88%$2.35$2.83$0.51$7,95915,754.49$3.34
TPMTPG Telecom Ltd231.93%$1.71$2.05$3.61$2,753763.25$5.66
IINiiNet Limited194.06%$2.71$3.27$4.71$756160.40$7.98
MTUM2 Group Ltd90.93%$3.47$4.18$2.44$425173.72$6.62
AMMAmcom Telecommunications Ltd73.78%$1.12$1.35$0.60$152253.21$1.95
VOCVocus Communications Ltd111.01%$2.51$3.02$2.28$21292.99$5.30
MNFMy Net Fone Limited1,261.10%$0.20$0.24$2.51$14356.89$2.75
MAQMacquarie Telecom Group Ltd-48.82%$10.16$12.23-$7.03-$14821.05$5.20

Table 2.  ASX Telecomms Stocks at Aug-2014 (1 of 2)

TickerCompany nameShares (M)PriceP/E ratioMkt Cap ($M)Dividend yield
XJOS&P/ASX 2005,566.50
TLSTelstra Corporation Ltd12,173.84$5.5816.76$67,9305.29
SGTSingapore Telecommunications Ltd15,754.49$3.34$52,6203.09
TPMTPG Telecom Ltd763.25$5.6627.91$4,3201.50
IINiiNet Limited160.40$7.9822.29$1,2802.51
MTUM2 Group Ltd173.72$6.6223.03$1,1503.25
AMMAmcom Telecommunications Ltd253.21$1.9522.11$4943.19
VOCVocus Communications Ltd92.99$5.3070.85$4930.26
MNFMy Net Fone Limited56.89$2.7533.89$1561.64
MAQMacquarie Telecom Group Ltd21.05$5.2025.13$1094.62

Table 3.  ASX Telecomms Stocks at Aug-2014 (2 of 2)
Return on avg assetsReturn on avg equityReturn on investmentNet profit marginGross marginOperating marginEmployeesRevenue ($M)Net income ($M)