TPG Telecom Ltd: Tracking better than feared and delivered HoH growth

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
23 August 2021, 9:00 AM
Sectors Covered:
Telecommunications, Technology

  • TPG reported its 1H21 result. This is the first time we’ve seen some runs on the board from the merged group. EBITDA of $886m was inline (-2%) versus our forecast. It was down 3% yoy but pleasingly up 2% from 2H20 to 1H21.
  • No formal FY22 guidance was provided but management noted there is no significant 1H/2H seasonality in the business. This suggests FY21 EBITDA of ~$1.7bn is in the ballpark.
  • We have trimmed our EBITDA forecasts by ~4% and retain our Add recommendation.

Event: 1H21 result

Revenue -3% yoy (1H21/1H20) / -6% hoh (1H21/2H20) to $2.6bn; Gross profit - 7% yoy / -4% hoh to $1.3bn; OPEX -4% yoy / +3% hoh to $366m and EBITDA - 3% yoy / +2% Hoh to $886m. 

Operating cashflow was weak largely due to some timing issues that are expected to fully reverse in 2H21. TPG declared a much larger dividend than we had forecast (8cps versus our 4cps forecast). This also suggests confidence that cashflow weakness is short term.

Analysis

Investors may have been disappointed to see limited weak cashflow from a traditionally strong cash generative business. That said there are some timing issues at play and TPG pointed out that this pushed ~$200m of cash receipts from 1H21 into 2H21. Full year operating cashflow is broadly expected to match EBITDA so this should revert strongly in 2H21.

TPG/Vodafone has been bleeding mobile subscribers for some time. This is partially related to a lack of international students/travellers (Vodafone is a global brand). Data released today shows the mobile subscriber declines is slowing and TPG is close to turning its subscriber adds positive.

This combined with higher ARPU across the industry (and new customers ARPU being ~$3.50 above reported ARPU) suggests that mobile EBITDA will rise. The exact timing of this is unclear but, in our view, looks likely within the next twelve months.

Forecast and valuation update

We reduce our EBITDA forecasts by ~4% while higher Depreciation, Amortisation, Interest and tax push our reported NPAT meaningfully lower. This change includes our now expensing tax through its P&L. We do not expect TPG to pay tax anytime soon (and have no tax payment through a cashflow statement).

However, since bringing tax losses into the accounts last year, TPG must now expense tax through the P&L. This is accounting noise and no cash tax is actually paid in our forecasts for the next two years. None the less it reduces our NPAT forecasts meaningfully.

Investment view: Add retained

We retain our Add recommendation on TPG.

The result shows, that earnings have stabilised and, in our view, there is value in the name.

Price catalysts

Wider launch of 5G fixed wireless services and TPG’s 5G mobile services later in CY2021. This could drive a return to mobile subscriber growth.

Higher contracting ARPU in mobile is already occurring, over the next twelve months, this should result in higher mobile services revenue and EBITDA.

Return to mobile subscriber growth when international travellers return to Australia (Vodafone is global brand).

Risks

Earnings stabilisation. The investment market is still getting to understand the earnings base of the merged entity and EPS has been downwardly revised.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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