Why I think growth investors should buy TPG Telecom Ltd shares today

Internet services and mobile business TPG Telecom Ltd (ASX: TPM) this morning held its AGM with its chairman and chief executive David Tech telling investors he was confident the group had a great future despite the shellacking it has received on the back of the NBN Company debacle and associated margin crunch.

TPG Telecom appears to have a rock solid management team that it’ll need as it builds out mobile networks in both Singapore and Australia in a bid to counter the profit margin-crunching effects of the household switch to the NBN network.

The telco stated it was “tracking well” to full year guidance for EBITDA between $815 million to $820 million, including capital expenditures of $270 million associated with the build out of its twin mobile networks.

As at September 31 2017 the group had debt of $900 million and cash of $46 million meaning its net debt to trailing EBITDA ratio stood around a respectable 1x, with the telco updating the market that it has extended its bank debt facilities to $2.39 billion to provide the firepower for its mobile network rollout. As such it seems any thoughts of an upcoming capital raising can be dismissed.

TPG’s future is in moving away from the “very competitive” and “low margin” NBN market as fast as it can over the years ahead. Fortunately, its corporate fibre optic and data centre services business continues to grow robustly thanks to business won across the private and government sector.

Just today it flagged that it has won a substantial new contract with the local government of Adelaide to provide fibre-optic supported internet services.

The internet services sector is fast-changing though with the shift to wireless potentially growing over the long term as TPG invests in its backhaul fibre and mobile networks to profit in the future.

Australians can expect some super-cheap mobile plans on the TPG mobile network when it launches in 2019 and starts to compete with market-leading mobile provide Telstra Corporation Ltd (ASX: TLS) on price.

Competition is what TPG does best and I expect this well-managed challenger to the established but static mobile players could offer investors excellent returns over the years ahead given today’s valuation of $6.10 is only around 12.5 trailing earnings per share.

Granted FY 2018’s result could be down on the prior year, but I rate the stock a buy on its potential to deliver long-term profit growth in today’s fast-changing communications sector.

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Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Telstra Limited and TPG Telecom Limited. 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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