TPG Telecom can finally get on with its operational improvement strategy now that the Vodafone merger and the NBN buildout are largely behind it. The potential is substantial given the mature mobile market environment and the chance to capture a decent slice of the home wireless market.
TPG’s network expansion sets the scene for growth in mobile penetration. Earlier this year, TPG signed an important network sharing agreement with Telstra which is still subject to regulatory approval. The deal will enable TPG to more than double its geographic coverage in regional Australia and deliver 5G connectivity as it is rolled out. By 2025, TPG expects it can offer 5G coverage to over 90% of smaller regional towns and areas while offering 99% coverage in metro and larger regional cities and areas.
TPG’s 5G network rollout will be accelerated with higher capex in FY22f. By lifting capex to $1,000-1,050 million in FY22f, TPG is seeking to accelerate its move to national 5G coverage by 2025. Within that total, approximately $500-550 million is the actual transformation capex to 5G while a further $100-200 million is allocated for investment in new assets such as expanding the fibre network. The balance is sustaining capex.
The network deal with Telstra should enable TPG to narrow the pricing gap with Telstra and Optus. It could also provide a chance to win back some market share after its postpaid subscriber base fell to 17.8% share in FY21. In a fairly rational mobile environment, TPG should be able to increase prices as its competitors are already doing. The Vodafone main mobile plan is $40/month compared to Optus at $55 and Telstra at $68 after its recent price increase.
TPG can also grow earnings in fixed broadband from home wireless. The company is targeting 160k subscribers by the end of 2022. Further growth in on-net fixed subscribers together with potential price increases would also see revenue growth in fixed broadband.
The sale of TPG’s tower assets in May for $950 million represented a multiple of approximately 32x EBITDA. The net proceeds will amount to about $890 million and will be used to reduce debt which was just over $4 billion on 31 December 2021.
Investment view
TPG is at a point where it can begin to substantially improve its operating performance, particularly in mobile. TPG is at the start of a multi-year improvement in financial performance too, driven by growth in mobile service revenue, and improved broadband profitability.
Risks to investment view
If TPG failed to increase its mobile market share, revenue or margins, its earnings could be affected. Competition in the Australian telecommunications market is keen, while the sector is closely regulated.
The overhang from David Teoh’s 14.2% stake remains a headwind for the share price.
Higher interest rates and inflation may also impinge on earnings growth.
Recommendation
We have retained our Buy recommendation.
