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

With new mobile plans being revealed lately, TPG Telecom Ltd (ASX: TPM) aims to deliver a quality mobile network for about $600 million, the first of its kind offer on mobile network. This is slated to be made available from Q3 to Q4 2018 with an attractive data plan under which unlimited data is free (first 1GB of data each day at full 4G speeds with a capping at 1 Mbps) for the first six months and thereafter charged at about A$10 per month. The plan, however, has no voice component and will initially cater to city suburbs of Sydney, Melbourne, Brisbane, Adelaide and Canberra. This move is believed to have a deflationary pressure on mobile industry ARPUs, with TPM's eventual A$10 price point set much below industry ARPU.

Offering Free Unlimited Mobile Data plan on its New Australian Mobile Network: TPG Telecom Ltd (ASX: TPM) recently reported that the much-talked about mobile plan would be made available to the first TPG customers and would be absolutely free for the first 6 months and is expected to be available in Q3-Q4 2018. The plan is Unlimited Data, with the first 1 GB of data every day supplied at 4G LTE speeds, after which speed will be capped at 1 Mbps for the remainder of the day. After the 6 month free period, clients could opt to pay a monthly charge of $9.99. Management intends to leverage this offer to attract new customers wherein they could experience the best coverage and network performance. This promotion is the first of its kind in Australia and indicates a new phase of competition in the mobile market. The SIM purchase and product support would be available via TPG's online platform, wherein customer sign up would be available exclusively via the TPG website. Initial mobile network coverage would include CBD areas and several nearby suburbs in Sydney, Melbourne, Adelaide, Canberra and Brisbane. The group’s network rollout is continuing while their mobile network coverage would enhance over time as the group intends to leverage extensive fibre optic network assets.

Fastest NBN provider as per ACCC’s Measuring Broadband Australia program: The group has been rated as the top NBN provider for average download speed in ACCC’s Measuring Broadband Australia program. They achieved average download speed of more than 90% of the maximum plan speed even during busy hours, beating both Telstra and Optus, as per the test findings. Management sees these results are an indication of their network assets that connect to the 121 NBN Points of Interconnect nationwide, their fibre and transmission backhaul and Australian and International Internet capacity. The group has also recently updated their quarterly average typical evening speeds in accordance with ACCC guidelines. The recent results brought the telco ahead of Telstra and Optus for nbn12, nbn25 and nbn50 speed tiers. The group is confident over the speeds and encouraging customers to check the typical evening speeds of various NBN providers so that they do not commit to a provider with poor speeds and service. The group has more than 341,000 NBN subscribers as of 2018 half year, rising by over 79,000 subscribers from the end of 2017 Financial Year.
 

Average download speed (Source: Company Reports)

Rise in costs: For the first half of 2018, the group’s underlying EBITDA slightly rose to $418.2 million as compared to $417.6 million as reported in the prior corresponding period. The group’s first half of 2018 EBITDA outcome did not include material irregular items and is therefore representative of underlying EBITDA for the period. On the other hand, during the last year, the 1H17 EBITDA result benefitted from $55.8 million on favorable non-recurring items (predominantly a profit realized on sale of an investment). Hence, despite a $55.2 million fall in reported EBITDA between 1H17 and 1H18, 1H18 EBITDA rose slightly. The group faced rising costs from the migration of DSL customers to lower margin NBN services, loss of gross profit from home phone services as customers migrate to NBN bundled services while there is an increase in electricity prices. This hurt their profits extremely but was offset by the strong $33m of other EBITDA growth achieved relative to 1H17. Major contributors to this growth came in from the Corporate Segment, TPG FTTB (‘fibre to the building’) services, and cost savings from the ongoing integration of iiNet.


Underlying EBITDA (Source: Company Reports)

Segment-wise performance: For the first half of 2018, the Consumer Segment’s EBITDA fell to $260.2 million as compared to $267.8 million in the prior corresponding period. But last year’s first half of 2017 performance included $7.0m one-off revenue, excluding which the underlying movement is a small ($0.6m) fall from 1H17 to 1H18. This change includes an $11.8 million fall in gross profit offset by a $11.2m fall in employment and overhead costs. The gross profit fall was on the back of broadband gross margin erosion and loss of home phone voice revenue, both due to the NBN rollout. This fall in employment and overhead costs reflects the results of further integration of iiNet operations within the broader group. The Corporate Segment EBITDA rose $158.9 million during the first half of 2018 as compared to $157.2 million for the first half of 2017. This includes $3.5 million of EBITDA related to FTTB which comprises the Corporate Segment’s 1H17 EBITDA recognized with the Consumer Segment in 1H18. The Corporate Segment is only $1.7 million higher during the first half of 2018 as compared to first half of 2017, while the comparable EBITDA growth for the segment was in fact $5.2m. This EBITDA growth was boosted by the ongoing strong data and internet sales offsetting ongoing declines in voice revenues.

Balance sheet performance: TPG Telecom delivered a solid cashflow during the first half of 2018 with $417.2m cash generated from operations (pre-tax). Total capital expenditure reached $791.8 million during the half year which included a $594.8m instalment for the 2x10MHz of 700MHz spectrum acquired at auction last year. Over $33.9 million was invested in the mobile network built in Singapore and Australia. The rest of the ‘business as usual’ witnessed a capital expenditure of $163.1 million which was $59.1 million lower than 1H17 as the fibre expansion for the Vodafone fibre contract neared completion. As at the end of 1H18, the Group had bank debt (net of cash) of $1,394.3m, which represents a leverage ratio of ~1.7x EBITDA, and had undrawn headroom of over $900m in its debt facilities to fund its rest of the mobile network investment. Management also delivered an interim FY18 dividend of 2.0 cents per share (fully franked), payable on 22 May 2018 to shareholders on the register on 17 April 2018.

Stock performance: The shares of TPM had been under pressure and lost over 11.4% in the last three months (as of May 25, 2018) on concerns over rising costs and heavy competition. But the group is launching a mobile plan with unlimited data, which subscribers will get for free for the first six months before being charged $9.99 a month. Despite there is no voice call function, the group is aiming to attract customers on offering unlimited data. Even with this plan, some experts have casted doubts on how the group will achieve network scalability while competitive intensity is on the rise with many players coming up with unlimited offerings. Nonetheless, management is hopeful on their small cell technology to manage the network requirements. The group set over $3 billion capital expenditure and would provide further clarity on this in the near term. Primarily, small cell deployment in Australia is ongoing with sites already installed in Sydney and Melbourne. Management also enhanced the guidance for underlying EBITDA for the Group for the full year FY18 which is currently expected to in the range of $825-830 million from $800-815 million. The small cell site access agreements are almost finished. The High density of small cell sites and deployment of Cloud RAN (Radio Access Network) would offer a platform for 5G services. TPM is on track to achieve a milestone of nationwide outdoor service coverage in Singapore by the end of 2018. TPM stock rose over 4.73% in the last four weeks and is still trading at an attractive P/E. The directors of the company including Joseph Pang and Shane Teoh have lately increased their stake through acquisition of fully paid ordinary shares (399 each). The group’s Return on Equity has also been at 8% which is same as that of industry median and its return on capital invested is also more or less over 5% in the last two years. Group’s trailing 5-Year EPS Growth has also been above peer median. We rate a “Buy” on the stock at the current price of $ 5.59 (up about 1% on May 28, 2018).
 

TPM Daily Chart (Source: Thomson Reuters)

 
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