or NBN, and take-up of high-traffic products such as Internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. TPG Telecom’s price-leader strategy still sees the company delivering solid subscriber and market share performance. Product bundling has also become a key segment in the market, with all players using broadband as a lead-in product and cross-selling voice, mobile, pay-TV, and digital streaming services.
The ownership of submarine cable between Australia and Guam offers the group broader cost advantages. Pricing is mainly a function of demand and supply, available capacity, and the length of cable. Economies of scale play a large part in pricing where costs are measured on per unit of volume. Contracts are structured in typical 15-year
leases, providing some certainty in revenue. Clients are allocated a fixed bandwidth and have the right to on-sell capacity. Maintenance fees of 3%-4% of the lease are also levied.
Financial Strength
TPG Telecom’s financial health is solid. Historically, management has used debt to finance acquisitions and demonstrated a capacity to pay it down in due course. As of June 2021, net debt/EBITDA was 2.8 times, well below the covenant limit of 3.5 times. Highlights from the 2021 first-half result support the key planks of our positive investment thesis for TPG Telecom. The NBN-inflicted EBITDA damage in the broadband unit is on track to fall less than management’s prior AUD 60 million projection for the full year (AUD 25 million in the first half), down from AUD 83 million in 2020.
Moderating fall in subscribers (128,000 in June half 2021 versus 361,000 in December half of 2020), and ARPU (underlying post-paid down 1.6% in first half versus an estimated 2.3% in 2020) are signs of likely improvements to come. While shares in narrow-moat-rated TPG have climbed 30% since the May 2021 lows, they remain 13% below our unchanged AUD 7.40 fair value estimate.
The 4% decline in corporate EBITDA to AUD 236 million was especially disappointing. It was mainly due to a fall in lowmargin legacy services, as underlying EBITDA margin was up to 53.2%, from 52.3% a year ago. Nevertheless, the shortfall in this division, coupled with continuing likely impact from COVID-19 (AUD 11 million in the first half) has led to 2% decline in our 2021 group EBITDA forecast to AUD 1,779 million. TPG’s broadband business will also benefit from management’s concerted push into fixed wireless, to bypass the National Broadband Network, or NBN. Indeed, 17,000 fixed wireless customers were signed up in the current second half to date, just a month after launch of the TPG-branded fixed wireless product.
Bulls Say’s
- Cross-selling opportunities remain for both consumer and corporate markets.
- The merger with Vodafone Australia increases the scale of the combined entity and allow it to better compete against Telstra and Optus in the Australian market.
- Further rollout of its fibre network also boosts growth, while incremental cost from an additional user is small.
Company Profile
TPG Telecom is Australia’s third-largest integrated telecom services provider. It offers broadband, telephony, mobile and networking solutions catering to all market segments (consumer, small business, corporate and wholesale, government). The company has grown significantly since 2008, both via organic growth and via acquisitions, and in July 2020 merged with Vodafone Australia. It owns an extensive stable of infrastructure assets. TPG is also a very nimble competitor in the telecom space, with an aggressive operating culture unencumbered by any legacy issues facing incumbents.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
