TPG Telecom Limited

TPG Details

TPG Telecom Limited (ASX: TPG) is engaged in providing mobile and fixed broadband telecommunication services to residential government, corporate enterprises, and the wholesale market.

H1FY21 Financial Performance

• Top-Line Performance: Revenue declined by 3% YoY, on pro-forma basis, and stood at $2.63 billion. The top line erosion was primarily driven by $119 million decline in service revenue, partially offset by a $39 million incline in handset revenue.
• Bottom-Line Performance: EBITDA declined by 3% YoY, on pro-forma basis, and stood at $886 million, primarily driven by $25 million NBN margin headwinds and $62 million of decline in Mobile gross profits, partially offset by a $38 million increase in opex synergies.
• Cash Flow Status: Net cash outflow from operations improved significantly to $173 million relative to $555 million PcP (pro-forma), primarily driven by reduced mobile spectrum payments. The overall negative net cash flow broadly represents the delay of sale of handset receivables.
• Financial and Liquidity Position: Net debt as of 30 June 2021 stood at $4.382 billion relative to $4.213 billion as of 31 December 2020. TPG improved its debt terms via refinancing $5.25 billion debt, with extended maturity dates and improved margins. Cash balance stood at $79 million relative to $120 million prior period.

Half-Yearly Financial Performance; Analysis by Kalkine Group

Key Risks and Challenges

TPG operates in a highly competitive and price sensitive industry, subject to ongoing technological changes, including business consolidations, and regulatory and legislative pressures. Potential congestion in network may lead to poor customer experience and frequent switches to competitor’s network.

Outlook

With 7.5 million customers & business services and strong brand portfolio (Vodafone, TPG, and iiNet), TPG focuses on scaling their telecom business via building fibre infrastructure and capability deployment. TPG seeks high growth potential from increased use of OTT platforms, award of best NBN provider and considerable network capacity for home wireless and mobile.

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

Stock Recommendation

The stock of TPG gave a negative return of ~6.952% in the past one year. The stock is currently trading higher than the 52-weeks’ average price level band of $4.810 - $8.230. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low single-digit downside (in percentage terms). The company might trade at a slight discount to its peers, considering sticky investor returns at low single-digit levels and downfall in mobile subscribers. For valuation, few peers like Swoop Holdings Ltd (ASX: SWP), Macquarie Telecom Group Ltd (ASX: MAQ), Telstra Corporation Ltd (ASX: TLS) have been considered. Considering the current market conditions, surged pricing competition, comparatively high losses, risk of network outage and frequently changing technologies, current trading levels, key risks associated with the business, and downside indicated by valuation, we suggest investors to book profits and give a “Sell” recommendation on the stock at the market price of $7.095, as of 06 October 2021, 10:47 AM (GMT+10), Sydney, Eastern Australia.

TPG Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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