One business I bought shares in early last week is budget internet and dark fibre provider TPG Telecom Ltd (ASX: TPM). At $7.20 the shares were trading on 16x trailing earnings with a decent medium-term growth outlook, which made the decision to buy shares relatively easy. This founder-led company is facing some margin compression as the NBN home broadband network grows, although it is investing in building its own high-margin fibre-to-the-premises alternative where suitable. However, over the short term the margin compression is expected to mean FY17’s underlying EBITDA comes in between $820 million to $830 million, which at the…
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One business I bought shares in early last week is budget internet and dark fibre provider TPG Telecom Ltd (ASX: TPM). At $7.20 the shares were trading on 16x trailing earnings with a decent medium-term growth outlook, which made the decision to buy shares relatively easy.
This founder-led company is facing some margin compression as the NBN home broadband network grows, although it is investing in building its own high-margin fibre-to-the-premises alternative where suitable.
However, over the short term the margin compression is expected to mean FY17’s underlying EBITDA comes in between $820 million to $830 million, which at the mid-point of guidance would still represent handy growth of 6.4% over the prior year.
The group’s corporate fibre-optic internet and cloud services division posted underlying earnings of $269.3 million in FY16, up 15% over the prior year, and I expect it has several more years of double-digit growth in it yet.
TPG also has a $1 billion deal with Vodafone Australia to provide dark fibre and network services to Vodafone, while TPG’s mobile customer base starts to use Vodafone’s 4G mobile network in a mobile virtual network operator type deal.
The two companies have a close and mutually beneficial business relationship and further deals down the line cannot be ruled out in a clear threat to Telstra Corporation Ltd (ASX: TLS).
TPG’s Machiavellian moves
Of course TPG itself is not immune to competition and recently many have cited Singapore-based home internet provider MyRepublic as a potential threat to TPG’s discount internet market share in Australia.
TPG currently provides unlimited data deals for $60 a month to Australian households and it’s this area that privately-owned internet reseller MyRepublic is expected to focus on in Australia after building out its business in Singapore and New Zealand.
However, MyRepublic’s operations in New Zealand are loss making and its startup costs in Australia are likely to lead to losses, with its core Singapore business also reported to have not yet turned a profit.
It’s notable then that TPG is now looking to move into Singapore by bidding in an auction for a license to provide a mobile network in the island state.
Moreover, TPG’s one competitor in the Singapore mobile-network auction is none other than MyRepublic.
This suggests to me that TPG’s founder David Teoh intends to take the fight to the loss-making MyRepublic in Singapore as MyRepublic itself attempts to steal market share from TPG in the Australian market.
The result of the Singapore auction is expected to be known soon and TPG has the cash flows to outgun MyRepublic in the auction if it so chooses. Startup operating costs for the new Singapore mobile network have been estimated to be north of US$200 million, which is a sum MyRepublic would probably have to go to the capital markets for given its reported operating cash flows.
Assuming the mobile network bidding does not go far beyond TPG’s estimate of fair value, I expect it to win the auction in what could be the first of a series of aggressive moves into the Singapore telecommunications market.
If it is successful in putting the squeeze on MyRepublic this may also have some serendipitous consequences for its already established competitors in the Australian and New Zealand NBN broadband services space such as Optus, Telstra Corporation Ltd (ASX: TLS) and others.
Overall, I think TPG shares look good value at $7.56 given its outlook, founder-led nature and valuation.
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Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited.
You can find him 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.