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TPG Telecom Ltd

Jul 30, 2018

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

Offering Free Unlimited Mobile Data plan on its Brand New Australian Mobile Network: TPG Telecom Ltd (ASX: TPM), is a leading player in the Australian telecommunications industry that provides nationwide ADSL2+, NBN, Internet Protocol Television (IPTV), SIM Only Mobile plans, Fibre Optic and Ethernet broadband access, telephony services, and various business networking solutions. The company is trying out the newest Australian mobile network with the mobile plan. According to which initially the TPM customers will be offered unlimited data absolutely free for the first 6 months and this was slated for availability in the third quarter or fourth quarter of 2018. The group will supply the first 1 GB of data every day at 4G LTE speeds, and post this the speed will be capped at 1 Mbps for the rest of the day. The customers who continue with the plan after the six month free period will then have to pay a monthly charge of $9.99. TPM has constructed their own network and introduced this very first on-net mobile product offering in Australia. With this move, a new era of competition has taken a shape in the mobile industry. Under the initiative, TPG will cover areas including CBD and surrounding suburbs in Sydney, Melbourne, Adelaide, Canberra and Brisbane for the mobile coverage at the initial phase. The group’s network roll out and mobile network coverage are said to find support from its fibre optic network assets. It is noteworthy that TPM reported for over 341,000 nbn subscribers as at the first half of 2018, and the number has advanced by more than 79,000 subscribers from the end of FY17.

Rated fastest NBN provider by ACCC’s Measuring Broadband Australia program: TPM was rated as the fastest NBN provider by ACCC’s Measuring Broadband Australia program, as per the March update. TPM has in fact, achieved average download speed of over 90% of the maximum plan speed even during busy hours, as per the analysis by ACCC through the program. This outweighs the statistics of competitors, including Telstra and Optus for nbn12, nbn25 and nbn50 speed tiers. These results were also a testament to TPM’s network assets that connect to the 121 NBN Points of Interconnect across the nation, the fibre and transmission backhaul and the Australian and International Internet capacity. The quarterly average typical evening speeds have also been now updated as per the ACCC guidelines.
 

Average Download Speed (Source: Company Reports)

Strategy for Rollout of Mobile Networks in Australia and Singapore: The building of mobile network in Australia and Singapore is progressing well, and the outlook for capital expenditure on both projects is in line with the initial forecasts. The small cell deployment is also on track in Australia, while the company has already installed sites in Sydney and Melbourne. The group expects to improve delivery of high volume of small cell sites with the refined small cell deployment model. Further, the accesses to small cell site agreements are now substantially complete by the company. The high density of small cell sites and deployment of Cloud RAN will provide a platform for 5G services to the company. The company is on track to achieve milestone of nationwide outdoor service coverage in Singapore by the end of 2018. Meanwhile, TPM and its competitors are bidding for 5G spectrum auction. TPM is expected to spend as much as $300 million for this auction while Telstra planning to spend up to $700 million at the auction. Vodafone is also in race for this 5G auction.

Ten Gigabit Adelaide: Ten Gigabit Adelaide was designed for businesses and corporate big data users, that are located in the Adelaide CBD, which gives the city-based businesses a distinct competitive advantage. This enables the businesses to send high volumes of data, quickly and securely, between their offices, business partners and clients around the world. Apart of the fact that Ten Gigabit Adelaide is designed for big data users, importantly it is available at a price that makes it accessible to all businesses in the City of Adelaide. TPM is so far in process of offering services to 40 buildings, but the company is shortly finalizing an additional 160 buildings. The network is expected to be progressively rolled out to 1,000 buildings within the next two years. As a result, TPM is appointed as Official Network Partner to deliver and install the new fibre optic network, provide 10 Gbps uncontested and synchronous data transfer capability and a range of high-performance services tailored for each individual user. Moreover, this transformational network has been progressively rolled out from early 2018 and will result in a wide range of new possibilities for businesses and organisations without being inhibited by the restrictions and congestion often experienced by existing internet services. Further, in a recent independent report, the South Australian Centre for Economic Studies puts the quantified productivity and efficiency benefits of Ten Gigabit Adelaide in the range of $16 million to $76 million per annum. It is projected that Ten Gigabit Adelaide could generate between 1,400 and 2,500 jobs over the first six years of the fibre infrastructure's life. 40 FTE jobs per year will be created during the construction period alone. Overall, Ten Gigabit Adelaide is the first network of its kind in Australia and the network will leverage TPM's infrastructure expertise to offer products and services to the Adelaide Business community. Furthermore, the network will underpin future innovation in areas such as robotics, artificial intelligence, way-finding, 3D printing and augmented reality.


Ten Gigabit Adelaide (Source: Company Reports)

First Half 2018 Financial Performance: TPM for the first half 2018 had delivered 5% growth in the underlying Net Profit After Tax to $217.70m and underlying revenue grew 1% to $1,252m.However, despite a $55.2m fall in reported EBITDA in 1H18 compared to 1H17, the underlying EBITDA rose slightly in 1H18 from $417.6m to $418.2m. The rise in underlying EBITDA is achieved despite the significant headwinds experienced in 1H18 due to 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 and electricity prices have increased. In 1H 2018, the main contributors to earnings growth is from the Corporate Segment, TPG FTTB (‘fibre to the building’) services, and cost savings from the ongoing integration of iiNet. Additionally, TPM for 1H 2018, had generated $417.2m cash from operations (pre-tax). The total capital expenditure for the half year 2018 was $791.8m, including a $594.8m instalment for the 2x10MHz of 700MHz spectrum acquired at auction last year and $33.9m invested in the mobile network builds in Singapore and Australia. The remaining ‘business as usual’ capex was of $163.1m, which was $59.1m lower than 1H17 due to the fibre expansion for the Vodafone fibre contract neared completion. At the end of 1H18, TPM had bank debt (net of cash) of $1,394.3m, which represents a leverage ratio of approximately 1.7x EBITDA, and had undrawn headroom of over $900m in its debt facilities to fund its remaining mobile network investment. Additionally, for the 1H 2018, the Consumer Segment’s gross profit declined due to the broadband gross margin erosion and loss of home phone voice revenue, both due to the NBN rollout. The significant decrease in employment and overhead costs also reflected the results of further integration of iiNet operations within the broader group. The Corporate Segment’s EBITDA grew due to the strong data and internet sales offsetting ongoing declines in voice revenues.


1H 18 Financial Performance (Source: Company Reports)

Raised the FY 18 Outlook: TPM has raised the outlook for the FY 18. The company now expects the underlying EBITDA for the Group for the full year FY18 to be in the range of $825-830m compared to the previous guidance for the underlying EBITDA to be in the range of $800-815m.

Stock Recommendation: Meanwhile, TPM stock has risen 1.99% in three months and 10.8% in last one month, as on July 27, 2018  and is trading at a reasonable P/E of 13.09x. TPM will give tough competition to its peers due to launch of their own mobile offering. TPM is the  second largest fixed operator in Australia, with more than 700,000 NBN subscribers which add up to a total of 1.9 million fixed broadband subscribers. TPM provides end-to-end network infrastructure that includes over 400 DSLAM enabled telephone exchanges across Australia, extensive metropolitan fibre optic networks, and the international PPC-1 submarine cable connecting Australia and Guam with onwards connectivity to USA and Japan. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 5.73 (up 1.776% on July 30, 2018).
 

TPM Daily Chart (Source: Thomson Reuters)



 
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