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TPG Telecom Ltd

Apr 24, 2017

TPG:ASX
Investment Type
Mid - Cap
Risk Level
Action
Rec. Price ($)

Company Overview - TPG Telecom Limited is an Australia-based company, which is engaged in the provision of consumer, wholesale and corporate telecommunications services. The Company conducts its operations through three segments: TPG Consumer, TPG Corporate and iiNet. The TPG Consumer segment provides retail telecommunications services to residential and small business consumers. The TPG Corporate segment provides telecommunications services to corporate, government and wholesale customers. The iiNet segment provides telecommunications and technology services to residential and business customers. The Company's telecommunications services include the provision of data, Internet, voice, telehousing, network capacity and other services to consumers and corporate customers. The Company provides a range of National Broadband Network (NBN) services. The Company also provides broadband services over its fiber to the building network.



TPM Details
 
Speculation of TPM planning to acquire Vodafone:TPG Telecom Ltd (ASX: TPM) stock sentiment has rebounded owing to many latest updates and few conjectures, including the speculation that the telco giant could be interested in acquiring rival Vodafone. According to media reports, TPM’s decision to become Australia’s fourth mobile network can jeopardize position of its peers such as Vodafone. Moreover, an acquisition of Vodafone (with 5.6 million subscribers) can serve to be a huge threat to Telstra and Optus. The group has project management expertise in large mobile network building projects like constructing 4,000km of dark fibre to Vodafone network towers and the Singapore mobile project.
 
Acquisition of the mobile spectrum in the 700MHz band:TPG Telecom which offers fixed-line broadband services as well as third-party mobile services, has planned to spend an additional A$600 million over three years rolling out its own network to cover 80 percent of Australia’s population. This is because TPM has successfully bid for 2x10MHz of mobile spectrum in the 700MHz band at the recent auction conducted by the Australian Communications and Media Authority (ACMA). TPM’s plans indicates for a fresh competition for the three existing network owners in Australia - Telstra, Singapore Telecommunications Ltd.’s Optus and a partnership between Vodafone Group Plc and Hutchison Telecommunications Australia Ltd. TPM as Australia’s newest network operator, will enjoy a number of ‘new entrant advantages’, including being able to deploy current advanced technology, requiring fewer mobile towers, and not needing to support legacy equipment (for 2G/3G networks). The company’s vital mobile components are already in place including Australia’s largest national dark fibre network, call centers and back-office systems supporting over 2 million customers. TPM has enormous backhaul capacity throughout Australia through the group’s 21,000km fibre network and thousands of potential sites for deployment of mobile antennas are already connected to that fibre network. The company also has large scale infrastructure construction and project management expertise with experience in large mobile network building projects such as the construction of 4,000km of dark fibre to Vodafone network towers and the Singapore mobile project. Therefore, TPM is looking forward to leveraging its combination of telecommunications infrastructure assets and industry expertise to continue to maximize value for its shareholders. Further, the new network would break even on earnings before interest, tax, and depreciation and amortization basis with 500,000 customers. Additionally, 700MHz spectrum is considered a premium spectrum currently in use for mobile networks due to its excellent propagation, which means fewer towers need to be deployed to cover larger distances, that makes building coverage being more efficiently provided. Together with the TPM group’s existing portfolio of Australian spectrum holdings, that include spectrum in the 2.5GHz and 1,800MHz bands, TPM is positioned to deliver mobile communications services across Australia. The 700MHz spectrum license would start from April 01, 2018 and will expire on December 31, 2029. 

TPM Timeline (Source: Company Reports)
 
Capex and Funding:To fund the capital expenditure required for the network rollout and the spectrum payments over the next three years, TPM had announced a 1 for 11.13 accelerated non-renounceable pro rata entitlement offer of new TPG ordinary shares at an offer price of A$5.25 to raise A$400 million. The company has successfully completed the institutional component of the Entitlement Offer and has raised or received the binding commitments covering approximately A$320 million of the total A$400 million to be raised under the Entitlement Offer. The Retail Entitlement Offer is expected to raise approximately A$80.5 million. The funds raised will be used for payments relating to TPM’s acquisition of 2 x 10 MHz of spectrum in the 700MHz spectrum auction for approximately A$1,260 million, payable in three annual instalments and the capital expenditure associated with the rollout of TPM’s mobile network.
 
Financial Performance in the first half of FY 17: TPM in 1H 2017, has reported 28% increase in the underlying NPAT by $45.2m to $207.5m primarily due to the EBITDA growth plus a $17.0m (pre-tax) decrease in net financing costs due to a reduction in the quantum and cost of the group’s bank debt. The 1H17 reported results include $48.8m profit realized on the sale of equity investments ($35.3m post tax) and $7.0m non-recurring revenue earned by the Group’s Consumer Division ($4.9m post tax). 

1H FY 17 Financial Performance (Source: Company Reports)
 
Reaffirmed FY 17 outlook:The group expects the underlying EBITDA for FY 17 to be $820-830m, which the company has reaffirmed under its outlook. Moreover, TPM intends to implement a DRP commencing for the FY17 final dividend, which is expected to remain in place for the next two to three years. The group intends to fund their capex via Entitlement Offer, operating cash flow, borrowing capacity, and other capital management options in the next three years. The group intends to pay their gross auction price of $1,260 million in instalments of $605 million (less a deposit of $10 million), $352 million and $352 million (inclusive of interest) due in January 2018, January 2019 and January 2020, respectively.
 

FY 17 Guidance (Source: Company Reports)
 
Industry Drivers:Australia has a minimum of 32.6 million mobile services and shows a growth of 2.6% in 2016 as compared to the prior corresponding period. Australian Mobile penetration is currently 143% and still promises opportunity as the Population growth in the country is robust, and forecasted to exceed 30 million by 2028. This indicates that the country would witness a steady rise in the mobile market. Meanwhile, Australian mobile industry generates an aggregate EBITDA of over $8 billion, promising a solid opportunity for a new entrant. TPG is aiming for this opportunity and intends to leverage their new acquisition. The group has already built a backhaul capacity throughout Australia via their 21,000km fibre network. They already have thousands of potential sites for deployment of mobile antennas connected to that fibre network. Moreover, the group is also aiming for a cross selling opportunity as they intend to upsell mobile services to their 2 million Australian retail and corporate subscribers. TPM also has a strong owned international capacity connecting customers to the rest of the world. Their call centers and back-office systems have already supported over 2 million retail customers and built a solid portfolio of strong brands appealing to a diverse range of demographics. Accordingly, the group expects to reach breakeven EBITDA from its Australian mobile network with only 500k subscribers which is a market share of over 2%. 

Mobile Strategy (Source: Company Reports)
 
Stock Performance: TPM stock price has fallen over 14.02% in the last three months (as of April 21, 2017) but recovered over 7.8% in the last five days alone. Trading of TPM shares was halted prior to the acquisition announcement and an associated A$400 million rights offer to help fund the network and the spectrum purchase. The group’s efforts in Australia's 4G mobile market by buying spectrum as well as announcing plans to build a $1.4 billion (1.12 billion pounds) network to rival Singapore Telecommunications, Telstra Corp and Vodafone Group is revamping the sentiment on the stock. Although some concerns seem to erupt on mobile strategy’s ability to be NPV accretive, boost from ARPU (Average Revenue per User) will become crucial to handle the situation while the group does not expect the acquisition to have any impact on underlying FY17 EBITDA and aims to maintain headroom to its net debt/ EBITDA covenant. The company has a decent dividend yield and is trading at an attractive level. We give a “Buy” recommendation on the stock at the current price of $ 5.96

 
TPM Daily Chart (Source: Thomson Reuters)


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