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Here’s why you should stick with your TPG Telecom Ltd’s shares

Telecom and broadband service provider TPG Telecom Ltd (ASX: TPM) has caught the attention of many investors recently. The stock is up around 62% in the past twelve months, blowing away the nearly flat gain of the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO).

One of the reasons is that the company is developing an alternative high-speed broadband service network to the much anticipated National Broadband Network rollout. The stock offers great potential over the near-term still.

Why I am interested in this stock

First of all, the company has set itself apart from some of its competitors by developing its own extensive internet network infrastructure. It doesn’t just supply retail broadband and mobile services.

The company has acquired such physical assets as submarine communications cables forming a link for Australia to the rest of the world, as well as buying the former ISP company AAPT for its inter-capital bandwidth and network infrastructure. This way it can also be a wholesale service provider for other ISPs and get a piece of the fees they charge their customers.

So it makes money from its own customers, can create cost savings from lower network expenses as the infrastructure operator, and could have the extra income stream from servicing its competitors.

What has to happen for the company to succeed?

Its strategic purchase of AAPT and its network will allow it to further grow its physical network in urban areas according to regulations covering NBN service providers. TPG’s new focus happens to be in highly populated urban areas in capital cities where higher paying customers work and reside.

Its planned “fibre-to-the-building” (FTTB) high-speed broadband system should be faster to set up than the NBN rollout, so TPG Telecom can possibly have a first mover advantage in those lucrative business areas.

First estimates were that about 500,000 residents and businesses could be located within the areas TPG Telecom can set up to service. Not all of those will become direct customers. Other telecom companies like Telstra Corporation Ltd (ASX: TLS), iiNet Limited (ASX: IIN) and M2 Group Ltd (ASX: MTU) will be offering retail services as well. Still, TPG Telecom can get some income as a wholesale provider.

What are some barriers standing in its path?

Thankfully, the ACCC has allowed the company to compete directly with the NBN Company on grounds of fair competition, or this great plan would have been scuttled. However, regulators may demand that TPG Telecom split its business between wholesale and retail services. This may lessen the profitability of the original plan, but getting a smaller portion of a still very deep pool of customers will be a boon for business.

Investors should keep up on the developments and regulator announcements to have a good handle on how TPG Telecom’s plans can play out.

Consensus forecasts are for company earnings to grow around 21% annually over the next two years, so this is one fast grower you probably will want to hold shares in for this potential business expansion.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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