TPG Telecom Ltd (ASX: TPM)

Mixed bag of half year result: TPG Telecom’s stock plunged by 4.6% on March 20, 2018 while it provided a mixed bag of HY 2018 results. The revenue for 1H 2018 was $1,252.0m, while EBITDA was $418.2m. The NPAT came at $198.7m with EPS for 1H 2018 of 21.5 cents per share. The group’s EBITDA represented underlying result while 1H17 EBITDA result benefitted from $55.8m of favourable non-recurring items. As a result, a $55.2m decrease is noted in reported EBITDA between 1H17 and 1H18 while underlying EBITDA increased slightly in 1H18 from $417.6m to $418.2m despite 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 rise in electricity price. Primarily, growth from the Corporate Segment, TPG FTTB (fibre to the building) services, and cost savings from iiNet integration have supported the incremental rise. TPM’s continued strong data and internet sales have helped manage declines in voice revenues.
 

Underlying EBITDA (Source: Company Reports)
 
The Group delivered another cashflow result in 1H 2018 with $417.2m cash generated from operations (pre-tax). Total capital expenditure for the half year of $791.8m included a $594.8m instalment for the 2x10MHz of 700MHz spectrum acquired and $33.9m invested in the mobile network builds in Singapore and Australia. The group’s capital expenditure outlook on key projects (mobile network builds in Australia and Singapore) remains in line with initial forecasts. With fibre expansion for the Vodafone fibre contract nearing completion, the remaining business’ capital expenditure of $163.1m was $59.1m lower than 1H 2017. An interim FY18 dividend was declared in line with the final FY17 dividend of 2.0 cps (fully franked), payable on 22 May 2018 to shareholders on record on 17 April 2018.

While the result was a decent one, TPM stock still lingered low owing to result slightly falling short of market expectations. Nonetheless, the group has upgraded the guidance for underlying EBITDA for the full year FY18 to be in the range of $825-830m from$800-815m, and this comes at the back of capability to have a sustained performance despite the challenges that have cropped up in the telecom sector in last few years. The group has rather benefitted from a slowdown in the NBN rollout and is also eying the 5G Spectrum auction. In view of the 8.9% drop in stock price in last three months while potential remains intact, we maintain a “Buy” at the current price of $5.76

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