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 key positives from TPM's result were:
- consumer overhead costs fell A$11.2m to A$140.2m which offset NBN margin compression;
- the Australian and Singaporean mobile rollouts are tracking in line with TPM's initial capex and timing assumptions; and
- 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 key negatives from the result were:
- the Consumer Division saw gross margin compression throughout all categories;
- group subscriber net adds declined by c4k, with on-net and off-net DSL declining at a faster rate than NBN adds increased;
- corporate growth was relatively benign (c3% EBITDA growth on 1% revenue growth); and
- even with the delay in the NBN's HFC rollout, 2H18 EBITDA is still expected to be down on 1H18.
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:
- 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
- mobile progress in Australia and Singapore.
We retain our Hold recommendation.
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