As one of Australia’s largest broadband providers TPG Telecom Ltd (ASX: TPM) is becoming a real force in the industry, second only to Telstra Corporation Ltd (ASX: TLS). I’ve been very impressed with the progress it has made in recent years, and I think there are five key reasons you should consider buying the shares of TPG Telecom right now.
The first reason is the strong geographical presence of each of its brands which the acquisition of iiNet brought with it. Back in the day there was a gentlemen’s agreement between the founders of iiNet and Internode to not advertise in each other’s home territory. I feel this enabled the two brands to become the dominant alternative to Telstra in Western Australia and South Australia, respectively. Eventually, iiNet would go on to acquire Internode, and then the rest is history.
The second reason is the growth of its corporate segment. It was only six years ago that it was contributing approximately 10% of total sales, whereas, as of its most recent report, its corporate segment provides almost half of its total sales. The business and corporate side of iiNet was a strong point with its high quality ADSL and SHDSL services, and provided $204 million of iiNet’s revenue in FY 2014. I see this continuing its strong level of growth in the future, boosting top line growth.
The third reason is its growing broadband subscribers, which now equal 1.8 million. Even if you exclude the subscribers gained through the iiNet acquisition, its total broadband subscribers grew by around 8% year over year. But perhaps the best part of this is that the average revenue per user has grown for seven consecutive years. Growing subscribers and the average revenue per user is the perfect combination.
The fourth reason is the opportunities ahead in mobile. I see mobile phone plans as being a huge growth driver for the company in the future. With just 320,000 mobile subscribers at the end of its last fiscal year, this is some distance behind its competitors such as Telstra with a huge 16.7 million and Amaysim Australia Ltd (ASX: AYS) with a very respectable 764,000.
The fifth and final reason is that I believe the earnings growth ahead for TPG Telecom is outstanding. Thanks to the NBN rollout, growth in mobile, and increased reach through the iiNet merger, I agree with the analyst consensus estimate according to CommSec of earnings growing at nearly 27% per annum through to 2018. This level of growth is hard to find on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), and I feel even beyond 2018 the company will be growing at an above-average rate.
Although the shares may appear a little on the expensive side with a price-to-earnings ratio of 29, due to their fantastic growth prospects they trade on a PEG ratio of just 1.1. I believe this makes the shares worthy of paying a premium to own. But of course, it is always worth remembering that shares with high expectations have a tendency of falling hard when they fail to deliver. Thankfully, I have a lot of confidence its great management team will deliver on its potential.