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Should you buy TPG?

TPG Telecom (ASX: TPM) is a business well placed in the Australian telecommunications industry.  It provides a diverse range of communication services to residential users, small and medium enterprises, government and large corporate enterprises.

TPG offers nationwide ADSL2+, Fibre Optic and Ethernet broadband access, telephony services, Internet Protocol Television, Mobile plans and various business networking solutions. It also provides cloud-based servers, applications and storage. TPG owns end-to-end network infrastructure which includes over 400 telephone exchanges across Australia, extensive metropolitan fibre optic networks, and a submarine cable connecting Australia and Guam with onwards connectivity to USA and Japan.

TPG’s business is moving towards the more profitable corporate market. Since the first half of 2010, the corporate market share has increased from 20% to 44%, and is growing. This is a major positive for sustainable profit growth, as earnings are less reliant on the highly competitive consumer broadband market.

TPG reported NPAT up 41% to $78.29m for the half-year ended 31 January 2013. EPS were 9.9 cents compared to 7.1 cents last year. The interim dividend declared was 3.5 cents compared with 2.75 cents last year. The directors have upgraded the group’s FY13 EBITDA guidance from $263-273 million to a new estimated range of $285-290 million.

TPG has recently announced the acquisition of Telecom New Zealand (ASX: TEL), including subsidiaries AAPT and PowerTel, to be completed 28 February, 2014. At a cost of $450 million on a debt only basis, the effect is an additional 12.5% debt to equity, bringing the total to 18%. Extrapolating from these figures, the resulting interest cover is 13.9 times, which is quite reasonable and should in no way put the company at risk. Furthermore, by using debt only for funding the takeover, there is no dilution of shares for TPG shareholders.

By acquiring Telcom, TPG expects to augment and supplement its range of services, such as additional customer access network capability and the opportunity to cross-sell to the additional customers.

Overall, TPG is improving its business rapidly by increasing the number of customers and expanding services to customers.  With deregulation in the telecommunications industry, TPG and its rivals, Telstra (ASX: TLS), Hutchinson Telecommunications (Australia) (ASX: HTA), M2 Telecommunications (ASX: MTU) and iiNet (ASX: IIN), and others, compete on a level playing field, where once Telstra had a monopoly with its copper wire network.

However, with substantial infrastructure of its own, such as extensive metropolitan fibre optic networks and the international submarine cable to Guam, connecting Australia to USA and Japan, TPG has its own infrastructure, making it a relatively low cost supplier.

Foolish takeaway

The market has taken a favourable attitude to the acquisition of Telecom New Zealand, as there was a strong rise after the announcement, which  augurs well for the future of TPG. There can be little doubt that this stock is one to buy for the long term to successfully participate in the future of telecommunications in this country.

 

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Motley Fool contributor Chris Koenig does not have shares in any of the companies mentioned.

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