The share price of TPG Telecom Ltd (ASX: TPM) tumbled this morning after the company posted a mixed full-year profit result and downbeat outlook.
Shares in the telecommunications group tumbled 4.8% to $8.30 at the open, making it the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with CSR Limited (ASX: CSR) and Afterpay Touch Group Ltd (ASX: APT) trailing in second and third spot.
TPG delivered a 0.5% increase in revenue to $2.5 billion, which was around $31 million below consensus, and a 0.7% improvement in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $841.1 million, which was comfortably ahead of its guidance of $825 million to $830 million.
The margin squeeze from moving residential customers to the national broadband shaved $43 million from its EBITDA and this pain is expected to increase with management tipping a circa $50 million hit in FY19.
Management believes EBITDA for the current financial year will fall to between $800 million and $820 million and it declared a final dividend of 2 cents a share.
This takes FY18's dividend payment to 4 cents a share compared with the 10 cents it paid the year before. Income investors won't like this stock as this puts its yield at 0.7% – and that's with the franking included!
This stands in contrast to the near 10% gross yield on Telstra Corporation Ltd (ASX: TLS), even though this is likely to fall in FY19.
But none of this should come as a surprise to TPG shareholders. If anything, the big drop looks like an overreaction given that its problems with the NBN have been well flagged.
The FY19 EBITDA guidance is also meaningless as TPG is in the process of merging with Vodafone Australia and the outlook doesn't take the merger into account.
If anything, I see more positives in the result than negatives. Good demand for its fibre to the building (FTTB) service from businesses helped offset the losses from the NBN, while synergies from its iiNet acquisition are also contributing to earnings growth.
What's more, its business-as-usual capex was lower than anticipated with management spending $258 million instead of the $270 million to $310 million it thought it needed to complete the rollout of its mobile network in Australia and Singapore.
This may also be due to the upcoming marriage to Vodafone. TPG may be taking its foot off the gas on capex in anticipation of the merger, which is expected to bring significant cost savings for both parties.
It's still going to be a challenging environment for TPG even if the merger proceeds, although rational competition could return to the embattled industry.
I think TPG posted a decent result but don't see much value in its share price at these levels. Telstra looks like a better option on valuation grounds.
