The TPG Telecom Ltd (ASX: TPM) share price will be in the spotlight today as the telco reported FY19 earnings that were ahead of guidance but warned of more NBN pain to come in the current financial year.
It's a good thing that the TPG share price isn't laden with bullish expectation given that it has shed nearly a quarter of its value over the past year while its peers like the Telstra Corporation Ltd (ASX: TLS) share price jumped around 14% and Vocus Group Ltd (ASX: VOC) added 8%.
TPG also underperformed the broader market with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index rallying around 5% over the period.
Down could be the new up for TPG
Its underperformance could be a good thing here. Shareholders probably aren't expecting management to post a FY19 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of $824 million compared to its guidance of $800 million to $820 million and FY18's figure of $828 million.
Perhaps a more accurate way to describe this earnings figure is re-adjusted EBITDA. Its adjusted EBITDA is actually $818.4 million (a modest 1% drop over FY18) with the figure stripping out a $236.8 million impairment of its Australian spectrum license and $9 million cost relating to the proposed merger with Vodafone Hutchison Australia (VHA).
It's re-adjusted EBITDA not only ignores these one-off items but it also excludes any impact of its mobile network operations in Australia and Singapore.
If you aren't totally confused, the key takeaway is that earnings is holding up better than I had feared and the 0.8% decrease in revenue for the year to $2.5 billion is also pleasing given the multiple headwinds buffeting the stock.
A bright spot in the result
While its consumer business is under pressure from the National Broadband Network, its corporate services division is offsetting some of the pain as that part of the business posted a rise in EBITDA to $367.1 million for FY19 compared to last year's figure of $329.7 million.
This largely stemmed from a significant increase in a contract to provide fibre services to VHA.
Aggressive cost cutting also helped the group protect EBITDA margins with management holding its final dividend steady at 2 cents a share.
FY20 "peak pain" for TPG
But the worse isn't over. Management is warning investors to brace for further earnings loss as most of its customers migrate from ADSL to the lower margin NBN service.
It's re-adjusted EBITDA is expected to fall to between $735 million and $750 million in FY20, which would equate to a slide of up to 11%.
Could FY20 represent "peak NBN pain"? By the end of this financial year, management said only 15% of its customers will be on ADSL.
Assuming the NBN operator doesn't jack wholesale prices up again, this year could be a turning point for the embattled telco.
There's also a chance that TPG's merger with VHA can proceed as the companies are trying to overturn the block from the competition watchdog. The market would welcome the consolidation.
