In morning trade the TPG Telecom Ltd (ASX: TPM) share price has climbed 4% to $5.43 after the telco company posted a full-year underlying net profit after tax of $417.3 million for the 12 months ending July 31 2017. This was a 16% increase on FY 2016 and was achieved despite full-year underlying revenue increasing just 4% to $2,483.7 million.
While a significant reduction in net financing costs was a key driver of this strong growth, TPG Telecom also benefitted from irregular one-off items. These included a $35.3 million post-tax profit realised on the sale of equity investments and a $4.9 million post-tax gain from non-recurring revenue from its Consumer segment
However, excluding the irregular items from its earnings before interest tax, depreciation, and amortisation (EBITDA) in FY 2016 and FY 2017 would still mean solid annual growth of 8% to $835 million. This is $5 million above the top-end of the $820 million and $830 million guidance range management provided in September of last year.
The company's Consumer segment delivered EBITDA of $473.7 million on revenues of $1,740.7 million. This was a 10.5% and 4.8% increase, respectively, on the prior corresponding period and was driven by a range of factors. These included an extra 3 weeks' contribution from the iiNet business compared to FY 2016, organic growth from NBN and FTTB subscriber growth, and the continued realisation of financial benefits from its iiNet integration activities.
Whilst its performance wasn't as strong as the Consumer segment, I felt the Corporate segment put in a solid performance this year. Segment revenue increased 2.3% to $743 million and segment EBITDA came in 4.2% higher at $312.8 million thanks to continued strong data and internet sales and margin expansion.
TPG Telecom's capital expenditure was $576.3 million for the year. This was the result of its $207.5 million mobile spectrum purchases, an acceleration in the fibre expansion for the Vodafone fibre contract, and the acquisition of additional international capacity.
Thanks to strong free cash flow generation from its operations and a capital raising, management was able to pay down a significant amount of debt during the year. This led to its bank debt reducing to $900 million, which represents a debt to EBITDA leverage ratio of just under 1.1x.
Dividend
The board has decided that it is in the best interests of shareholders to retain a greater proportion of profits to fund its mobile rollouts.
As a result, the company's final dividend has been reduced to 2 cents per share from 7.5 cents. This takes its total FY 2017 dividends to 10 cents per share fully franked.
Looking ahead
Management took this opportunity to update the market on its mobile strategy. According to the release, it is on course to achieve the first milestone of nationwide outdoor service coverage in Singapore before the end of 2018. Pleasingly, capital expenditure projections remain within its early assumptions.
In Australia, the company has entered into agreements with multiple partners to gain access to a large volume of sites to provide mobile coverage to major metropolitan areas. The implementation of initial site clusters in Sydney, Melbourne and Canberra is expected to be complete by mid-2018.
Outlook
While management believes that TPG Telecom is positioned for another year of solid growth in FY 2018, unfortunately it expects this to be largely offset by NBN margin headwinds which will impact EBITDA by approximately $60 million.
In light of this, FY 2018 EBITDA guidance is in the range of $800 million and $815 million, compared to FY 2017's $835 million.
Should you invest?
Whilst I have no doubt that TPG Telecom's mobile strategy is positioning it for a return to growth in the next couple of years, until then NBN margins look likely to weigh heavily on its results and restrict growth.
But with earnings per share coming in at 47.9 cents, its shares are changing hands at 11x earnings now. This is reasonably cheap and could potentially make TPG Telecom worth considering, especially if it does return to growth in FY 2019.
