TPG Telecom’s interim report is full of promise but fell short of market expectations in the short term. It is taking longer than hoped for the business to deliver on its potential, but the upside should be worth the wait.
TPG reported 1H22 EBITDA of $837 million including $35 million of restructuring costs. This was down 5.3% on last year and reflected higher NBN wholesale access charges and higher mobile handset costs.
Mobile subscriber numbers lifted 135k with postpaid numbers increasing 22k. The latter was mildly disappointing, and we expect a pickup in 2H22f considering the investment TPG has been making in its network. Postpaid mobile ARPU increased to $42 per month and this is good news as TPG has stemmed the decline and is no longer losing market share. Assuming the ACCC approves the network sharing agreement with Telstra, we think TPG can lift market share further as the deal expands its addressable market. Both Telstra and Optus have been increasing ARPU, opening the door for Vodafone (TPG) to follow suit.
Prepaid subscriber numbers are recovering strongly. TPG added 120k prepaid subscribers in 1H22 as Australia’s borders re-opened. With international students and other overseas visitors trickling back into Australia, these numbers could go higher.
Broadband subscribers were stable during the period. This may not change following TPG’s $5 price increase that will impact around half of the NBN customer base.
Fixed Wireless subscribers increased 33k in 1H22 to 113k with the end of year target still 160k. TPG said consumer demand is strong for this product and will only increase as modem supply issues ease and 5G home wireless is extended to a bigger proportion of the customer base. FWA remains the big sleeper in TPG’s arsenal.
Merger synergies remain on track for $125-150 million this year. Controllable costs are coming down by about $80 million this year before inflation puts a dent in it next year.
Investment view
There were no major issues with TPG’s 1H22 result, just slightly lower revenue and slightly higher costs across the business. The share price has reacted poorly and perhaps has not considered the bigger picture. Despite the slower rate of progress, we think there is plenty of long term potential here for Australia’s third largest telco to build a more substantial mobile and broadband business.
The substantial synergies from the Vodafone merger are emerging, but the transaction was always going to take considerable time to get into top gear.
Fortunately, the fundamental metrics are heading in the right direction at a time when the Australian mobile market is maturing nicely. TPG’s mobile pricing needs to close the gap with its peers. A $5 postpaid price increase would add about $160 million EBITDA in a full year. Given Vodafone’s main mobile plan is $42/month compared to Optus at $55 and Telstra at $68, there is ample scope to incrementally lift pricing without risking an exodus.
The network sharing deal with Telstra is a good one, but still needs the ACCC tick of approval. It would give TPG a chance to improve its lagging market share in mobile.
The big opportunity in Fixed Wireless is coming but again, patience is needed before any material earnings are realised. TPG is targeting 160k FWA subscribers by the end of 2022 and 20% of base by 2025.
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 ACCC decision on the network sharing deal with Telstra is due by the end of the year. Rejection of this deal would be negative for the stock.
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.
