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Blog

TPG Telecom

Nick Harris

Result summary

Revenue for TPG Telecom (TPM) was up 1% year on year while costs were up 8.5% year on year and resulted in reported EBITDA being down 11.7% year on year to A$418m (in-line with our A$413m forecast). Lower depreciation and interest expenses year on year (due to capitalising the mobile builds) meant underlying NPATA of A$217.7m was 7.6% ahead of our forecast and up 4.9% year on year. Reported earnings per share of 21.5c was down 18.6% year on year. TPM declared a 2.0 cents per share dividend which was down 78% year on year and in-line with our forecast. Capex of approximately A$800m was spent over the half and was nearly double operating cash flow which meant free cash flow was -A$486.5m and debt edged higher. Despite investing A$1bn in capex over the last 12 months, depreciation and interest expenses declined year on year (as TPM is capitalising mobile network related costs until their product offering goes live).

The good

The key positives from TPM's result were:

  1. consumer overhead costs fell A$11.2m to A$140.2m which offset NBN margin compression;
  2. the Australian and Singaporean mobile rollouts are tracking in line with TPM's initial capex and timing assumptions; and
  3. delays to the HFC rollout of NBN have resulted in lower migration from TPM's DSL network (c350k now expected in FY18 vs 400-500k previously expected which represents a A$10-15m EBITDA benefit).

Looking forward, TPM are hoping to secure a mobile roaming deal but at this stage have provided no further detail. They also expect a 'substantial uplift' in fibre revenues from 1 May 2018 (a three-month contribution in 2H18) on the Vodafone backhaul contract (which also helped TPM build a mobile network backhaul cheaply). The key reason for the 1-3% FY18 EBITDA guidance upgrade to A$825-830m (from A$800-825m previously) was the NBN delays.

The bad

The key negatives from the result were:

  1. the Consumer Division saw gross margin compression throughout all categories;
  2. group subscriber net adds declined by c4k, with on-net and off-net DSL declining at a faster rate than NBN adds increased;
  3. corporate growth was relatively benign (c3% EBITDA growth on 1% revenue growth); and
  4. even with the delay in the NBN's HFC rollout, 2H18 EBITDA is still expected to be down on 1H18.

Investment view

Following TPM's 1H18 result, we have upgraded our FY18 EBITDA forecast by 1.5% and downgraded FY19 by 0.3%. We have lowered our depreciation and interest expenses (due to TPM capitalising the mobile builds) which results in reported earnings per share increasing approximately 12% over the next two years. Lower EBITDA and free cash flow see our valuation and share price target decrease (Morgans clients can login to view).

Key upside and downside risk relates to:

  1. TPM's ability to manage earnings compression from the NBN (we're basically at the half way mark from a rollout perspective but timing means TPM is perhaps one-third of the way through the earnings hit); and
  2. mobile progress in Australia and Singapore.

We retain our Hold recommendation.

More information

Morgans clients can login to view our detailed report and share price target for TPG Telecom (TPM). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.