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Doubts over Telstra's $3bn spending plan

AAP logoAAP 12/08/2016 Lilly Vitorovich

Analysts are questioning the value of Telstra's suprise decision to plough an extra $3 billion into its networks.

Morningstar analyst Brian Han said there is "much investor scepticism" about the telecom giant's surprise decision to invest billions into its core network infrastructure.

But Mr Han did acknowledge that Telstra faces a big "earnings hole" once the NBN is fully rolled out.

"Faced with a choice of acquiring or starting significant new ventures, for example, overseas or in non-core areas, versus investing in the domestic core franchise to plug this earnings hole, we would unequivocally prefer the latter," Mr Han said in a research note.

Daniel Mueller, senior analyst at Forager Funds Management, said he was surprised by Telstra's spending.

"That sort of number blew me away," he said.

Mr Mueller also had doubts over the reason for such a large investment, questioning whether it was due to underinvestment in recent years.

Telstra has been hit by seven network outages since February, damaging its reputation and angering customers.

"The smell about it is, I think they just underspent on the network in the past, and this is catch-up spend because I just can't see how they generate an incremental return on this investment," Mr Mueller told AAP.

Deutsche Bank analysts Craig Wong-Pan and Peter Milliken were also "surprised by the sudden increase" in Telstra's captial expenditure over the next three years, saying in a research note they remained cautious until more details are provided.

Telstra is so far tight lipped on the details of the investment plans, which were delivered in conjunction with its annual earnings results on Thursday.

Telstra's shares were at their lowest level since June on Friday afternoon - down nine cents to $5.42 after trading steadily downwards for the past three weeks.

Telstra is already the dominant telco player, is limited in how much it can grow in mobile and broadband markets and is closely watched by the competition watchdog.

Telstra's leadership in the broadband market is expected to come under attack following the rollout of the National Broadband Network, which is slated for completion in 2020.

The NBN will be open to all telcos, blunting Telstra's competitive edge of having the nation's biggest broadband network.

As a result of the $3 billion investment, Telstra's capital expenditure-to-sales ratio will rise over the next three years from 15 per cent to 18 per cent - the highest since 2008/09 when the company was building up its 3G network.

Mr Penn expects the investment to retain customers and get them spending more, as mobile data consumption continues to grow.

The Telstra boss is also hoping operational and cost benefits will help plug the earnings hole caused by the NBN.

Telstra's $3 billion investment will be in addition to the previously announced $250 million to be spent on its network in response to the string of outages this year.

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