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Why Citigroup just slashed its TPG Telecom Ltd share price target

News that David Teoh-led telco operator TPG Telecom Ltd (ASX: TPM) is to invest around $1.9 billion in building out its own mobile network has sent the telco sector into a spin and telco analysts rushing to revise their price targets for the major telco players.

Financial news wires are reporting that analysts at U.S. investment giant Citigroup have adjusted their forecasts to reflect the huge amounts of additional capital expenditure for TPG to come in the years ahead.

TPG Telecom will fund its move into mobile via a mix of debt, operating cash profits, and a $400 million capital raising priced at $5.25 per share that will add to the number of shares on issues.

As a consequence the analysts at Citi have reportedly cut their TPG share price target to $6.70 which is fractionally above the last traded price of the shares.

TPG’s dividend payout is likely to come under pressure over the next couple of years and given that stocks are generally priced on estimates of their future cash flows this is likely to keep a lid on the share price over the short term. The big 21% discount to the last traded price for the capital raising may also create some very short-term selling pressure on the shares.

Still given its founder led nature, good cost control, and the fact that insiders including the founder and Washington H. Soul Pattinson & Co Ltd (ASX: SOL) own around 60% of the shares I’m inclined to think this stock could deliver stellar returns to investors over the long term.

I have flagged multiple times over the past year that TPG was likely to move into the mobile sector soon as part of a wider strategy to take market share from static larger rival Telstra Corporation Ltd (AX: TLS).

Accordingly, I continue to rate TPG’s shares as a good buy at a price anywhere under Citi’s $6.70 valuation.

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Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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