The share price of internet provider TPG Telecom Ltd (ASX:TPM) took a hammering last week in response to a weaker-than-expected outlook statement from management.
With the stock continuing to trend lower, shareholders are now nursing a loss of 29% over the past month.
That's an unpleasant experience for shareholders, on the positive side however, the lower share price is arguably offering compelling value.
With TPG having already been on my watch list and a company that I consider to have better than average growth prospects, now looks like a timely opportunity to take a closer look at the company.
Here's a recap on how TPG performed on an underlying basis (but including the contribution from its acquisition of iiNet) for the financial year (FY) ending 31 July 2016:
- Revenues surged 88% to $2.4 billion
- Earnings before interest, tax, depreciation and amortisation (EBITDA) leapt 60% to $775 million
- Net profit after tax expanded 46% to $100 million
- Earnings per share increased 39% to 43.1 cents per share (cps)
- Total dividends of 14.5 cps fully franked were paid for the year, representing an increase of 26%
Growth drivers
Given the size of the iiNet acquisition, it's important to note that the primary driver of growth was the contribution from iiNet.
Stripping out iiNet's contribution, revenue and EBITDA growth was just 2% and 11% respectively.
Pleasingly, TPG's subscriber numbers (excluding iiNet) showed solid growth year on year, rising from 821,000 to 885,000. For comparison the much larger Telstra Corporation Ltd (ASX: TLS) added 235,000 retail fixed broadband customers in FY 2016.
Why has the share price fallen?
The impressive headline numbers failed to win over the market. Instead, investors focussed on the muted underlying growth rates of TPG's business excluding the iiNet contribution.
What's more, EBITDA guidance for FY 2017 was lower than analysts were forecasting and capital expenditure (capex) forecasts were significantly higher.
The combination of higher capex spending which suggests competition is intensifying, coupled with apparent margin compression from the move to NBN wholesale pricing left investors nervous and uncertain.
Foolish takeaway
The market, in my opinion, has rightly reigned in its expectations for the rate of TPG's future earnings growth.
The tailwind of rising data usage and murmurs that NBN Co will adjust its pricing to a more favourable setting, does however (in my opinion) suggest that the long term outlook for TPG is far from dire.
The latest analyst consensus estimates for FY 2018 earnings per share imply a healthy growth rate of around 22% on FY 2016 to 50 cents per share.
With the shares trading near $8.70, the stock is on an estimated forward price-to-earnings ratio of 17 times which looks relatively undemanding to me (source: Reuters).
