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Deutsche Bank slaps $9.71 share price target on TPG Telecom Ltd

The most hotly debated question in the share market over the last week has been whether or not TPG Telecom Ltd (ASX: TPM) has made the right move in agreeing to invest around $1.9 billion to build its own mobile phone network.

Talking heads in the media and analysts on the research desks around Australia have delivered mixed verdicts on the deal, which has produced some wild share price swings across the telco sector for the likes of Telstra Corporation Ltd (ASX: TLS) and MNF Group Ltd (ASX: MNF).

Some analysts and commentators are reportedly unimpressed with the price TPG agreed to pay for the mobile spectrum and concerned that there’s not enough room in Australia to support a fourth entrant into the mobile market.

They think David Teoh (net worth $3.5 billion) doesn’t know how to run a telco and reckon you should avoid TPG shares given the large upcoming capital expenditures will hamper free cash flow growth and dividends.

However, in business it’s hard to generate long-term growth without investment and the analysts at Deutsche Bank appear to be happy to stand from the crowd in remaining bullish on TPG shares.

In fact according to financial news wires they’ve slapped a $9.71 price target on TPG shares due to the potential it could make market share gains across its mobile and other businesses.

Indeed most of TPG’s recent share price fall has come about due to a revision of the earnings multiple the crowd is willing to pay for it in an NBN world, rather than anything to do with the telco’s underlying performance.

On current estimates TPG sells for around 13x analysts’ estimates for full year earnings in FY 2017, whereas this time last year it consistently traded above 20x estimated earnings per share on prices around $11 per share.

I suspect over time TPG could produce more growth to earn a price multiple revision upwards and some strong share price gains to move it closer to Deutsche Bank’s share price target.

At $6.02 the shares look cheap to me given its outlook and I would agree with the investment bank to rate them as a buy.

Another business worth looking at that is investing heavily in future growth rather than just paying out dividends to impress short-term focused investors is SEEK Limited (ASX: SEK). Like TPG, it’s founder led and has multiple growth levers that could see it deliver healthy returns in the years ahead. Still, on current valuations I would prefer TPG as the better buy.

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Motley Fool contributor Tom Richardson owns shares of MNF Group Limited and 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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