TPG Telecom Ltd: Investor Day

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

24 June 2022, 8:30 AM

Sectors Covered:

Telecommunications, Technology

• TPG Telecom Ltd (ASX:TPG) hosted an investor day which was primarily focused on medium term aspirations to simplify and grow the business.
• The company has provided more granular details on a number of initiatives and more details on high level medium term aspirational targets. No formal guidance was provided nor was anything substantially new disclosed.

Event – Key takeaways from TPG Telecom’s maiden investor day

TPG expects to add >120k net mobile subscribers in 1H22. They added 60K in Q122 so this trend is consistent. Notably this represents a big turn-around in long term mobile subscriber trends. Vodafone had been losing customers for many years and this trend finally reversed from January 2022 as international travel resumed. International travelers represent roughly 1/3rd of the net adds. 

The return of inbound and outbound international travel will lift post-paid ARPU and this combined with subscriber growth should see mobile EBITDA grow in FY22.

TPG’s regional mobile sharing agreement with Telstra remains subject to regulatory approval. An interim decision is expected in August and a final decision on 17th October. TPG remain optimistic this deal will get approved given the data overwhelmingly indicates this deal creates a better outcome for consumers.

The Vodafone brand has been metro centric and, assuming this deal gets regulatory approval, it bolsters regional spectrum, increases regional competition and increases TPG/Vodafone’s addressable market by ~60%. It could also help reduce mobile churn as customers needing regional coverage often churn off Vodafone.

TPG’s target to end FY22 with 160k fixed wireless subscribers remains. 

The company reiterated its Enterprise target for $1bn of revenue by FY25 (of a $9bn TAM). 

TPG’s Wholesale fixed line residential access networks (which compete against the NBN) currently generate ~$100 revenue pa (135k active of 400k premises connected). This is just 34% take-up of TPG’s wholesale fixed line network. The balance is using the NBN or wireless. TPG is upgrading their fixed line network speeds to ~1Gbps this should drive better take-up of these high margin assets.

TPG has over 600 systems and there is a significant opportunity to simplify this which would improve customer outcomes and save TPG time and money.

The proposed tower asset sale will reduce TPG’s FY21 PF Net Debt / EBITDA (including leases) to 2-3x EBITDA, making them notionally investment grade.

The tower sale should result in a $350-400m accounting gain. Offsetting this is a $150m onerous lease recognition, $70-75m write-down of legacy network, higher rental costs and higher interest costs as TPG’s debt is variable rate.

Underlying forecasts unchanged – tower gain now included in stat NPAT

Our underlying forecasts are largely unchanged but we now include a ~$375m gain on tower sale. We had previously expensed deal costs so to balance the equation now assume this gets regulatory approval and is consummated in 2H22.

Investment view – Hold retained

Hold recommendation retained, Target Price increased from (login to view).

Price catalysts

On 13th July 2022 shares legally escrowed under the merger get released from escrow. These represent ~64% of shares on issue so this could potentially change TPG’s liquidity materially. Mr David Teoh can sell all of his shares from this point in time.

Vodafone and Hutchinson can sell some of their shares and have mutually agreed a number of terms that should somewhat stage the release of shares.

Wider take-up of 5G fixed wireless services and TPG’s mobile services. A return to sustained subscriber, ARPU and mobile EBITDA growth would be well received.

Continued return to mobile subscriber growth with international travellers returning to Australia and/or travelling overseas again (Vodafone is global brand).

Risks

Earnings stabilisation and regional tower deal completion, albeit low in our view.

The investment market, and ourselves, are still getting to understand TPG’s earnings base and the likely free cash generation of the business.

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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.