TPG Telecom Ltd: The ship has turned
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 28 February 2023, 7:00 AM
- Sectors Covered:
- Telecommunications, Technology
- TPG Telecom Ltd (ASX:TPG) FY22 result was, pleasingly, inline with expectations. Revenue was up 1.5% YoY and Underlying EBITDA (excluding the gain on tower sales and restructuring costs) was up ~4% YoY to $1,793m.
- This was in-line with our $1,786m forecast and consensus expectations while FY23 guidance is ~3% ahead of consensus. This was the first time since merging that positive earnings momentum is obvious across the group. TPG delivery subscriber, ARPU and EBITDA growth.
- We retain our Add recommendation and a (login to view) target price.
FY22 result shows momentum
TPG’s FY22 result was, at an underlying level, inline with our expectations. It was pleasing to see earnings momentum return to the business (subscriber numbers and ARPU both lifted).
This combined with tight cost control saw EBITDA lift year on year. The momentum looks here to stay and management guided to an FY23 Underlying EBITDA number which is up 6% YoY and slightly better than expected.
Forecast changes and investment view
We have upgraded our Underlying EBITDA forecast on better earnings momentum and downgraded our FCF forecasts on handset related working capital drag.
Add recommendation and (login to view) Target Price retained.
It is pleasing to see TPG release a solid result which suggests earnings momentum has returned to the business. Mobile subscribers and ARPU lifted as international travel returned. TPG/Vodafone grew their post-paid customer base as well which is critical and suggests they have returned to growth in the domestic market.
EBITDA growth from 1H22 to 2H22 was stronger than YoY, up an annualised 12%.
Price rises in NBN helped FY22 financials while price rises on new post-paid mobile plans (implemented in Jan 23) combined with a re-pricing of the back-book (commenced in Feb 2023 and likely to take until mid CY23 to take effect on).
The back-book price rise is more material as it will impact ~75% of TPG’s 2.9m post-paid subs or ~42% of their mobile customer base. Churn remains the key unknown but in our view, given the majors have all increased prices, TPG/Vodafone seems less likely to experience significant churn as a result of price rises.
The telco sector has, been under earnings over the last ~5 years, so price rises across the sector are required for TPG and Optus to generate a return above their WACC (financial sustainability). A rational market is pleasing to see.
Mobile has returned to growth after a number of tough years and has tailwinds from price rises and international roaming returning. While mobile did lift, mobile handsets caused a work capital drag as TPG moved from off balance sheet to on balance sheet funding handsets.
This was a drag on FY22 operating cash flow, and has been a ~$500m drag since the merger, and will have a $200-300m drag again in FY23 as the unwind continues. By the end of FY23 TPG’s handset receivables balance should be ~$250m, from $543m at Dec 2022.
FTTB / Vision subs were flat but a partial divestment remains on the cards.
TPG beat their FWA target, ending the year with 171k Fixed Wireless Access (FWA) subscribers. This was ahead of their targeted 160k subs and well up on the 113k they had in June 22. FWA growth was the key driver of AMPU (Average Margin Per Users) lifting HoH and YoY. NBN price rises also helped offset higher NBN input prices.
Consumer did the heavily lifting with revenue up 2.6% YoY and EBITDA up 4.3% YoY. While Wholesale, Enterprise & Government revenue lifted 1.2% YoY and EBITDA lifted 2.1% YoY.
Consumer Enterprise, Wholesale and Government has some legacy headwinds which have delayed managements $1bn rev target. However they also noted TCV wins in excess of $150m in FY22.
TPG has 100% variable rate debt so rising interest rates is likely to add more than $100m to their FY23 interest bill. Their cost of bank debt will increase ~75% from FY22 to FY23.
The other driver of higher interest expenses in FY23 will be a full twelve months of rent associated with tower sale in FY22. This was largely in our forecasts already and management are looking to refinance over CY23.
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