The Telstra Group Ltd (ASX: TLS) share price is under the spotlight after revealing a major plan to invest in intercity fibre routes.
Intercity fibre routes
Telstra announced today that five new major routes are going to be built as part of its intercity fibre project, as well as expansion of fibre connections across Western Australia’s Pilbara region.
The telco said that these investments would “deliver next generation digital infrastructure for the country” as demand for connectivity continued to soar.
First announced in February 2022, construction of the intercity fibre project commenced in March 2022. In August 2022, Telstra announced the first five priority routes, and construction is underway with more than 400km of cable already laid.
Detailed planning has commenced on an additional five routes, including connecting into Darwin from Adelaide, which will begin construction in 2025. This route “unlocks pathways to sub-sea cable infrastructure, provides new options for data centre locations including to service Asia”, and provides “important resilience” to the nation’s fibre pathways.
Ten routes, plus a major expansion and upgrade of the fibre network in the Pilbara region, are now in planning for FY23 to FY27. It will expand Telstra’s fibre footprint in the region, with around 165km of new fibre built to connect additional mining sites.
Financial details
Telstra said that funding for the updates to the intercity fibre project and Pilbara extension announced today, plus the Viasat project, would be at the top of the previously announced $1.4 billion to $1.6 billion strategic capital expenditure between FY23 to FY27, which is outside of business as usual (BAU) capital expenditure.
The telco said that the intercity fibre and Viasat projects are “on track” to deliver an internal rate of return (IRR) in the mid-teens or better, a nine-year cash payback, and around “$200 million in additional annuity income once all routes become ready for service and contributing.”
Cash payback and IRR are supported by expected contracts where a significant proportion of the long-term contract value is received upfront.
Management commentary
Telstra CEO Vicki Brady said:
Connectivity will continue to play a key role in our economy and there is enormous potential for digital technologies to rewrite Australia’s growth equation.
As the largest investor in digital infrastructure in Australia we are uniquely positioned to design and deliver this critical infrastructure, which will enable ultrafast connectivity between capital cities. Importantly, we have future-proofed the design and given ourselves the ability to extend this connectivity into regional and remote communities as demand grows and other partnerships arise, which will open up opportunities for regionally based industries and businesses.
This connectivity will build Australia’s fibre resiliency and support data centres that facilitate cloud and AI, remote working and education needs, health services, high-definition entertainment consumption and online gaming, and IoT use cases such as mining and agriculture. We are also continuing to see strong demand from hyperscalers looking for higher capacity and more direct routes.
Final thoughts on the Telstra share price
This seems like a big move, but it could be a smart move by the company. I think this makes it more of a buy than it was before. It was pleasing for shareholders that the company reaffirmed its guidance of underlying EBITDA (EBITDA explained) at between $8.2 billion to $8.4 billion, with strong performance for the mobile business.
