Company Overview: TPG Telecom Limited (ASX: TPG) is engaged in providing mobile and fixed broadband telecommunication services to residential government, corporate enterprises, and wholesale market. The company is the second largest listed telecoms company in Australia, serving greater than five million mobile customers along with over two million fixed customers.

TPG Details

TPG Rides on Merger Synergies and Enhancing Shareholder’s Value: TPG Telecom Limited (ASX: TPG) is engaged in providing consumer, wholesale, and corporate telecommunications services. The company remains on track to accelerate 5G release in Australian market, with a live network in more than 500 suburbs. Notably, the company has begun the testing of 5G fixed wireless network, with more than half a million customers currently using 5G mobile devices on their network. The company informed the market that it will also commence inviting preferred customers to access its 5G fixed wireless services next month. It has unveiled felix - Australia’s first telco brand, which is powered by 100% renewable electricity, with a target of achieving 100% renewable electricity powering the company’s entire Australian operations by 2025. The company remains on track to bolster its enterprise proposals leveraging new NBN products.

The 5G networks execution suggests a wide range of prospects for the key players in the room, especially due to the ever-increasing requirement in 5G technological enhancement. Consequently, technology-based companies are the largest beneficiaries of the evolution in 5G structure. In these difficult times, the company remains on track to support its customers, with Vodafone Hutchison Australia Pty Limited (VHA) merger in 2020.  Notably, the company unveiled 5G technology into its network, made good progress on its merger integration plans, and enhanced shareholder’s value by providing a dividend of 7.5 cents per share in FY20.

Coming to FY20 results, the company reported total revenues of $4.35 billion, depicting an increase of 24% year over year, with robust momentum in services revenues. The company reported EBITDA of $1.39 billion in FY20, up ~18% year over year. NPAT was reported at $734 million. However, the company witnessed a decline in its overall mobile subscribers as at 31 December 2020, due to the COVID-19 led scenario. Nevertheless, the company maintains a robust focus on providing a great experience for its customers, thus enhancing its overall network and service capabilities.

Past Performance; Analysis by Kalkine Group

In a recent development, the company, through its subsidiary, acquired a 400 MHZ millimetre wave 5G spectrum license for Sydney, Melbourne, and Perth. Whereas it acquired 600 MHz licenses for Brisbane and all other metropolitan and regional Australia. Notably, the company completed the rollout of 10 Gigabit network to 1,000 buildings in Adelaide in collaboration with the City of Adelaide in 2HFY20. The company anticipates commencing 5G fixed wireless services offering in 1HFY21.

Key Metrics, Balance Sheet and Liquidity: The company opines to have a decent balance sheet, owing to the synergies from merger. In the first six months post-merger, the company reported net cash flow from operations of $342 million. The company existed the period with cash balance of $120 million. As at 31 December 2020, net borrowings of the company stood at $4,210 million, down from $6,264 million as at 31 December 2019. The reduction in net borrowings depicts the restructuring of overall debt restructure due to the merger execution in July 2020.

In FY20, the company’s EBITDA margins stood at 32.7%, higher than the industry median of 31.6%. Net Margins stood at 16.8% in the same time span, higher than the industry median figure of 7.1%. In FY20, current ratio of the company stood at 0.47x, higher than the year ago figure of 0.21x. Debt to equity multiple for the same time span stood at 0.46x, lower than the industry median of 0.49x.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 78.49% of the total shareholdings, while the top 4 constitutes the maximum holding. Vodafone Hutchison (Australia) Holdings Ltd. held the maximum number of shares with a percentage holding of 13.64%, followed by Selector Funds Management Limited holding 7.94%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: TPG operates in a highly competitive environment, subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  Congestion in Network may lead to poor customer experience, as they are heavily dependent on the availability and performance of the company’s mobile and fixed networks. This, in turn, may impact the financial performance of the company, going forward. Also, higher expenditure, cyber threats, and adverse currency translations add to the woes.

Changes in Managerial Position: On 6 May 2021, the company informed the market that CFO, Stephen Banfield, will be stepping down from his post after being connected to the company for a period of 20 years.

What to Expect: Going forward, the company’s growth strategies, expansion of product suite, merger synergies and other investments are expected to boost the top-line growth of the business.  In FY21, the company is expecting more than $70 million savings from the Vodafone merger. It further expects to augment enterprise and government services offering with NBN Enterprises Ethernet. The company expects to enter 2021, with enhanced focus on customers and shareholders’ value. It targets to accomplish ~85% 5G population coverage in the top six cities in FY21. Further, expansion in the Australian 5G market and the implementation and roll-out of data prospects are likely to contribute potential upside in its FY21 financial performance.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has corrected by ~17.1% in the past three months. Currently, the stock is trading below the average of its 52-week’s high and low level of $9.7 and $4.81, respectively, proffering an opportunity for share accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at some discount as compared to its peer median, considering its increased costs related to 5G network rollout, stringent regulatory risk, stiff competition, and foreign currency risk. For that purpose, we have considered peers such as Vocus Group Ltd (ASX: VOC), Macquarie Telecom Group Ltd (ASX: MAQ), to name a few. Considering the increase in revenues in FY20, reduction in net debt, encouraging outlook, current trading levels, merger synergies, 5G network rollouts and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $5.68, up by ~1.61% on 11 June 2021.

TPG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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