2021 was a tough year for TPG Telecom as it worked through the merger with Vodafone, battled COVID disruptions and let its operating performance slip. But there is plenty of promise ahead in a stable mobile environment and a big opportunity in home wireless.
Mobile service revenue fell -9.2% in 2021 on lower subscriber numbers and ARPU. Postpaid subscriber were down 3.2% in the year while postpaid ARPU fell -4.5%. International border closures and a slower 5G rollout explained the decline.
Mobile numbers have stopped falling, according to TPG, and began climbing again from November when 5k postpaid subscribers were added together with 28k prepaid subs.
Postpaid ARPU has stabilised at $39.10, and a full year of roaming revenue will bring back another $2.20 in time.
The mobile pricing environment has become much more civilised and TPG should be able to lift its prices as it closes the 5G coverage gap to Optus and Telstra.
A significant piece of the coverage puzzle has been found with the new regional network sharing deal with Telstra. TPG will shut down its network in the agreed regional areas and use Telstra’s high quality network instead, while Telstra gains access to TPG’s spectrum. The deal gives TPG an instant low risk, low investment leg up against Optus. Essentially, a big chunk of cost has been taken out of the market.
TPG’s postpaid subscriber market share has faded to 17.8%, but we think this is fundamentally too low given the quality of the network. It should not be too difficult to improve.
Fixed wireless subscribers grew to 80k in 2021 and the company is targeting at least double this by the end of 2022. There is a significant opportunity in (home) fixed wireless given the composition of TPG’s customer base and the infrastructure within the company to achieve it. TPG will gently target its own customers first then broaden the attack to gain share, particularly at the lower end (speed and spend) of the market. There is still a surfeit of customers in smaller broadband providers that TPG can target. Pulling such customers onto its own network avoids having to pay the steep access charges to NBN Co.
TPG achieved synergy savings of $71 million in 2021 following the merger with Vodafone. The 2022 target for net cost synergies is $125-150 million which is ahead of the 2023 schedule.
Capex will be $1.0-1.05 billion for the next 2-3 years as the company has chosen to skew the spend towards network rather than spectrum.
Investment view
TPG should have a much better year in 2022 with less noise with which to contend. Mobile market share has likely bottomed, and revenue should improve with the return of roaming and potentially a price lift. A clever network sharing deal with Telstra in regional Australia should lift the overall quality of its network too. There is plenty of potential to optimise the full suite of products across a big customer base.
TPG is considering the sale of its mobile towers in a similar capital releasing transaction as Telstra did last year.
Risks to investment view
If TPG failed to increase its mobile market share and revenue, its earnings could be affected.
Competition in the Australian telecommunications market is keen, while the sector is closely regulated.
Recommendation
We have retained our Buy recommendation.
