The Telcos – which ones to avoid and which one to pick?
Oct 06, 2015 | Team Kalkine
Telstra Corporation
Ongoing leadership: Telstra Corporation Ltd (ASX: TLS) reported a slight income increase of 1.2% yoy to $26.6 billion on a reported basis for the fiscal year of 2015. But the group’s EBITDA and net profit after tax fell by 3.5% yoy to 5.8% yoy to $10.7 billion and $4.3 billion. On the other hand, the group delivered solid mobile and fixed data growth, driven by better mobile postpaid handheld ARPU, cloud hosted solutions as well as contributions from the strategic acquisitions made by Telstra SNP Monitoring (formerly SNP Security) and AFN Solutions. The group’s mobile customers rose by 4.1% yoy to 16.7 million in FY15 while mobile service revenues rose by 7.2% yoy, the highest growth in the last three years. At the same time, Telstra continues to face pressure from the consolidation of the smaller players, which would impact its growth prospects in the coming months. The Company also reported for an interest in investing in the Philippines but the impact is yet to be seen.
Product performance (Source: Company Reports)
The stock already corrected over 8.6% in the last three months. Even then we believe that the stock would continue to be under pressure in the coming months, given its limited growth opportunities. Accordingly, we place an “expensive” recommendation on TLS at the current price of $5.7.
TLS Daily Chart (Source: Thomson Reuters)
TPG Telecom
TPG partnership with Vodafone Australia: TPG Telecom Ltd (ASX: TPM) entered into a deal with Vodafone Australia worth of over $1 billion to shift the mobile customers of the group into TPG telecom. TPG would be delivering dark fiber and network services to 3,000 Vodafone sites which is estimated to generate a revenue of $900 million as compared to the capital expenditure of over $300 million to $400 million that would be incurred in the coming years for this project. Meanwhile, TPG Telecom also delivered outstanding performance during the fiscal year ended 2015, improving by 31% year on year (yoy) to $1,270.6 million driven by AAPT acquisition and organic growth. Accordingly, the EBITDA rose by 33% yoy to $484.5 million during the period, while earnings per share improved by 31% yoy to 28.2 cents. TPM also improved its dividends per share by 26.3% yoy to 6.0 cents per share. As a result, the shares of TPG Telecom delivered a solid year to date returns of 59.7% and rallied over 15.7% in just last four weeks alone. The group recently acquired iiNet, making TPM the second major firm in Australia.
EBITDA performance highlights (Source: Company Reports)
However, we note that the recent rally in the stock has placed TPG at expensive levels which is trading at a higher P/E of 38.5x. Moreover, TPG also delivers a relative lower dividend yield of 1.1%. Based on the foregoing, we give an “Expensive” recommendation on the stock at the current price of $10.67.
TPM Daily Chart (Source: Thomson Reuters)
Vocus Communications Limited
Deal highlights: Vocus Communications Limited (ASX: VOC) and M2 Group Ltd (ASX: MTU) recently executed Merger Implementation Agreement wherein both would merge as a full-service vertically integrated Trans-tasman Telecommunications Company. This deal would leverage the NBN in Australia and UFB in New Zealand. The merger would lead to an estimated combined revenue of over $1.8 billion and EBITDA of over $370 million in fiscal year of 2016, before synergies. The estimated combined market capitalization would be more than $3 billion. Moreover, the cost synergies are expected to be over $40 million per annum, and would be totally realized by the end of FY18. Exemplary revenue synergies would entail Vocus’ fibre enabling M2’s DSLAM network in ANZ and mobilization of M2’s distribution to further penetrate into Vocus’ on-net buildings. Balance sheet would also be solid having a leverage of over 1.8x net debt to FY16E EBITDA. Under the agreement, M2 shareholders will receive 1.625 vocus shares for each M2 share. M2 shareholders are expected to own 56% and Vocus shareholders will own about 44% of the combined group.
Combined synergies leading to a better product portfolio and revenue diversification (Source: Company Reports)
Performance: Vocus delivered solid performance during the fiscal year of 2015, wherein revenues surged to $315 million (on pro forma) or $150 million as compared to $92 million in FY14.
Better ASX market position (Source: Company Reports)
On the other hand, Vocus year to date returns fell by 7% and the stock is also trading at an expensive P/E of 32.11x. Vocus has only 0.5% dividend yield. We view the stock to be overvalued and accordingly give an “Expensive” recommendation at the current price of $6.15.
VOC Daily Chart (Source: Thomson Reuters)
M2 Group Limited
Recent Updates: M2 Group Ltd. (ASX: MTU) has taken a lot of attention with NAB becoming substantial holder on 28 September 2015 and execution of merger agreement with Vocus Communications Limited. The merger with Vocus has been seen as a strong way to hit the strength of the rival Telstra with regards to telephone and internet services. The company has recently purchased New Zealand’s CallPlus Group and 2Talk. The updates from the Australian Bureau of Statistics (ABS) about the surge in the data downloaded (via fixed land broadband) in the three months to end of June 2015 as compared to December 2014 quarter seems to help telecommunication companies such as MTU to benefit on the back of upgrading plans and even going for higher usage plan.
Performance: M2 revenues surged to $1.12 billion in FY15 against $1.02 billion in FY14 reflecting a 9% rise. Earnings before interest, tax, depreciation and amortization (EBITDA) surged by 6% to $170.5 million and net profit after tax rose by 10% to $73.7 million. The company declared 17 cent as fully franked dividend which took the full year dividend to 32 cent reflecting a 23% rise. The stock delivered an outstanding performance of 17.2% during this year to date and we believe this performance to continue forward, boosted by the Vocus merger agreement. M2 also has an annual dividend yield of 3.5%. Based on the foregoing, we give a “BUY” recommendation on M2 Group at the current price of $9.33.
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