Why I think TPG Telecom Ltd is the best telco to buy today

The Telstra Corporation Ltd (ASX:TLS) share price is down 30% lower over the past 12 months, showing that it is no longer the safe investment it once was. So what sort of growth opportunities do other telcos like TPG Telecom Ltd (ASX:TPM) and Vocus Group Ltd (ASX:VOC) offer for investors? 

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Once a darling of any serious income investor's portfolio, Telstra Corporation Ltd (ASX: TLS) has seen its share price decline by almost 30% over the past 12 months.  

The company's first half FY18 results were a mixed bag. Telstra's total income was up 5.9% on first half FY17, but it was forced to recognise a non-cash impairment of $273 million on Ooyala, its US-based intelligent video business, which dragged reported EBITDA down 2.5% to $5.1 billion and NPAT down 5.8% to $1.7 billion.

However, excluding the Ooyala write down, underlying NPAT was still up 9.5% to $2 billion. 

Increased industry competition combined with the rollout of the NBN has hurt Telstra. In first half FY18 alone the company absorbed a $370 million negative impact to EBITDA stemming from the NBN. However, Telstra has made some efforts to insure itself against these external pressures through a $3 billion strategic investment program. This includes capital expenditure on networks and digitisation which Telstra claims will deliver more than $500 million of EBITDA by FY21.  

So how are the other telcos performing? 

TPG Telecom Ltd (ASX: TPM) is due to release its first half FY18 results to the market on Tuesday. It will be particularly interesting to note how TPG is progressing with its planned mobile network rollouts in both Singapore and Australia. The company has been investing heavily in its strategy to challenge the established mobile phone providers in these two markets. It's a risky play, but it opens up significant growth opportunities if successful. 

Shares in TPG have lost almost 6% of their value over the last 12 months. However, they have rallied impressively since hitting a 52-week low of $4.86 in September to be just over $6 now. As a shareholder, I hope that some decent first half results can continue to build momentum behind the share price. 

Vocus Group Ltd (ASX: VOC) is having a tough time of things at the moment. In the last month, both its CEO Geoff Horth and chairman Vaughan Bowen have left the company. This came on the back of a disappointing first half FY18: underlying EBITDA was up by 8% on first half FY17 to $188.8 million, but statutory NPAT came in 21% lower at $37.3 million. The poor financial result forced Vocus to downgrade its full year guidance for underlying EBITDA from the $370 million to $390 million range to $365 million to $380 million.  

As expected, the market didn't respond favourably to this news, and shares in Vocus fell 16% in the days following the announcement. 

So was there any good news? On the positive side, revenues were up 4% and Vocus grew its NBN market share to 8.8%, plus construction of its flagship Australia Singapore Cable (ASC) project is still on track to be ready for service in 1Q FY19.  

I also own shares in Vocus, and I've been disappointed in the company's performance. But after this recent shakeup to its management and the news that the ASC project is progressing according to schedule, the company has done just enough to keep me from selling my shares. But it's on thin ice. 

Are any of these telcos worth adding to your portfolio? 

Vocus has disappointed recently, but it does still have some interesting growth prospects ahead of it – even if it might feel like too much of its fortunes are dependent on the success of its ASC project. I'm holding onto my shares, but it's probably one to avoid for new investors. 

Telstra used to be the MVP for most investors' portfolios, but nowadays it's being weighed down by the NBN. Plus, as the established player in the industry its growth opportunities are limited. That being said, Telstra's financial performance has still been reasonably strong and its share price may have been overly punished by the market.  

Of these three, TPG feels like the only company worth getting at least a little bit excited about, as it pursues its expansion projects at home and abroad. But this strategy is also expensive and entails its fair share of risk.  

As a long-suffering shareholder, it has personally been pleasing to see TPG's share price make some solid gains over the last few months. However, it seems like its shares have been in a holding pattern recently while the market awaits the release of its first half results. It will be one to watch on Tuesday.   

Motley Fool contributor Rhys Brock owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications 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 Scott Phillips.

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