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The TPG Telecom share price is up 58% this year: is it still worth buying?

The TPG Telecom Ltd (ASX: TPM) share price currently trades at around $10.65, having gained 58% so far this year.

Over 10 years, investors would have received 1,216% with dividends reinvested or 760% in capital gains alone. TPG truly has been one of the greatest success stories on the ASX.

That has come down to a number of factors…

  1. TPG has made sensible acquisitions of internet service providers and telecommunications companies, and now ranks as Australia’s second-largest provider of fixed broadband services behind Telstra Corporation Ltd (ASX: TLS). The recent acquisition of rival iiNet means TPG now has 1.7 million broadband subscribers, over 100,000 NBN subscribers, combined revenue of $2.3 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of roughly $654 million.
  2. Organic growth as Australians have taken up broadband services
  3. The rising popularity of subscription video on demand (SVOD) from providers such as Netflix means consumers need bigger data allowances and faster connections.
  4. Expansion into adjacent corporate products and services driven by the acquisition of AAPT has led to corporate EBITDA representing more than half of TPG’s earnings last financial year.

Can it continue?

With the ink barely dry on the iiNet acquisition, TPG is likely to post even better financial results in the 2016 financial year (FY16). Earnings are expected to rise from 28.2 cents last financial year to 40 cents, which works out to a P/E ratio of 26.6x at today’s share price.

That’s not exactly cheap, but then TPG has driven earnings growth at double-digit rates for many years. Over the past 10 years, TPG has seen earnings grow on average by 22.7% each year and 30% over the past five. Consensus forecasts point to more of the same over the next two years.

The problem TPG faces is that the larger it gets, the harder it is to grow at meaningful rates, as Telstra has already found. TPG is attempting to combat that by competing directly with the National Broadband Network (NBN) by connecting up blocks of apartments to its fibre network.

To regain growth in its mobile offering TPG has signed two deals with Vodafone. TPG will provide dark fibre and network services to more than 3,000 Vodafone Australia sites over 15 years, and construct 4,000km of new fibre. TPG has also switched its mobile wholesale customer base from Optus to the Vodafone network.

Foolish takeaway

At current prices, existing shareholders might want to hold onto their shares. New investors with a long-term outlook could consider buying in now.

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Motley Fool writer/analyst Mike King owns shares in Telstra and TPG Telecom. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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