Are These 3 Telecom Stocks Worth Investing at Current Levels- VOC, TLS, TPM

Stocks’ Details

Vocus Group Limited

Agreement to Settle Class Action Suit: Vocus Group Limited (ASX: VOC) is a vertically integrated telecommunication provider with operations in Australia and New Zealand markets. The market capitalisation of the company stood at $2.05 bn as on 28^th January 2020. The company recently announced that Kevin Steven Russell has made a change to its holdings in the company by acquiring 200,000 ordinary shares at the consideration of $594,399.51 on 9^th January 2020. In another update, the company announced that it has reached an agreement for settling the class action, which was started against the company in April 2019 in the Federal Court of Australia. The amount for the settlement was $35 million including interest and costs. The company would contribute an amount of $3.5 million to the settlement, which would be reported as a significant item below underlying EBITDA. The following picture provides an overview of the financial summary for FY19:

 
Financial Summary (Source: Company Reports)

Guidance for Underlying EBITDA: With respect to Vocus network services, the company is focused on revenue growth momentum throughout Enterprise, Government and Wholesale in FY20. For retail business, the company’s focus is on the revenue growth in mobile and energy. For FY20, the company is expecting Underlying EBITDA in the ambit of $359 million-$379 million.

Valuation Methodology: EV/ Sales Multiple Approach

EV/ Sales Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Even with fall in the revenues of Retail business, the company’s digital program, operating cost efficiencies as well as improved supplier negotiations helped the company to witness a rise of 1.8% in EBITDA margins in the retail business. We have valued the stock using EV/Sales based relative valuation approach and, for the purpose, we have taken peers such as Telstra Corporation Ltd (ASX: TLS), TPG Telecom Ltd (ASX: TPM), Amaysim Australia Ltd (ASX: AYS) and SpeedCast International Ltd (ASX: SDA) and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Thus, considering the decent valuation, focus of the company on its businesses, and other factors, we give a “Buy” recommendation on the stock at the current market price of A$3.240 per share, down 1.818% on 28^th January 2020.

Telstra Corporation Limited

Vesting on Retention Rights: Telstra Corporation Limited (ASX: TLS) is engaged in the provisioning of telecommunication and information services, which include mobiles, internet and pay television. The market capitalisation of the company stood at ~$46.15 Bn as on 28^th January 2020. The company recently via a release announced that during FY19, the company made a one-off issue of 13,245,705 ‘retention rights’ to eligible employees. The company also mentioned in the release that 5,115,570 of those ‘retention rights’ have been vested on 31^st December 2019. The below picture depicts an idea of FY19 financial results:


Financial Summary (Source: Company Reports)

What to Expect: The company would continue to target cost savings as well as productivity throughout its entire cost-base, not only its fixed costs. During FY20, the company anticipates a fall in total operating expenses ex-restructuring costs and impairments. It anticipates additional restructuring costs amounting to approximately $300 million associated with T22 in FY20.

Valuation Methodology: P/E Multiple Approach

P/E Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: During FY19, the company declared total fully franked dividend amounting to 16 cents per share. This implies that the company has returned $1.9 billion to shareholders in the form of returns. We have valued the stock using a P/E based relative valuation approach and arrived at a target price, which is offering an upside of mid-single digit (in percentage terms). Therefore, considering the target to reduced fixed costs by $2.5 billion by FY22 and returns provided to shareholders, we maintain a “Hold” rating on the stock at the current market price of A$3.860 per share, down by 0.515% on 28^th January 2020.

TPG Telecom Limited

Marginal Decline in Underlying EBITDA: TPG Telecom Limited (ASX: TPM) is in the provisioning of consumer, wholesale as well as corporate telecommunications services. The market capitalisation of the company stood at ~$6.57 Bn as on 28^th January 2020. The key personnel of the company recently addressed the shareholders and stated that FY19 was a difficult year for Group, where two major regulatory decisions taken by the company have negatively impacted its ability to deliver on its long-term strategies. The underlying EBITDA of the group for its core business witnessed a marginal fall of $4 million.


Financial Performance (Source: Company Reports)

Prospects for FY20: The group is expected to experience the greatest financial impact in FY20 from customer migration to NBN, together with the headwinds from residential DSL and home phone customers moving to NBN anticipated to be around $85 million. TPG forecasts to witness less than 15% of its residential broadband customer base remaining on ADSL by the end of FY20.

Stock Recommendation: Net operating cashflows before tax of the group were robust, surpassing the EBITDA at $836.3 million. With respect to Singapore business, the company continues to densify its mobile network in Singapore with additional sites to grow capacity and deepen indoor coverage. Net margin of the company stood at 7.1% in FY19 as compared to the industry median of 6.3%. This reflects that the company possesses decent capabilities to convert its topline into the bottom line as compared to the broader industry. Return on equity of the company stood at 6.1% in FY19 versus 5.7% of the industry median. TPM has price to book multiple of 2.3x as compared to the industry median (Telecommunications Services) of 3.1x on TTM basis. Thus, considering decent capabilities of converting topline into the bottom-line, returns to shareholders against the industry, we maintain a “Hold” rating on the stock at the current market price of A$7.150 per share, up by 0.989% on 28^th January 2020.
 
 
Comparative Price Chart (Source: Thomson Reuters)

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