The TPG Telecom Ltd (ASX: TPG) share price has gone off the ASX radar in the past few months, it seems. Backtrack to late June, and the imminent TPG/Vodafone merger was the talk of the ASX town. The old TPM-tickered TPG was about to join forces with Vodafone to form a newly merged telco. Investors were excited to see the fixed-line strength of TPG combined with the mobile reach of Vodafone's customer base. The spin-off of the old TPG's Singapore operations into Tuas Ltd (ASX: TUA) was also an exciting sidenote. In the 2 months leading up to the merger, TPM shares rose by more than 25%.
But since the merger came into effect, TPG shares have fallen off the radar. The TPG share price is down around 15% since 30 June, and the Tuas share price has offloaded more than 22%.
So what's going on? Is this a case of buyers' remorse?
What does the TPG share price tell us?
It's hard to value TPG using traditional metrics like the price-to-earnings (P/E) ratio given the 'new TPG' has only been around for a few months now.
But let's look at some numbers anyway. On current prices, TPG is being valued at a market capitalisation of $14.1 billion.
In its half-year earnings report which TPG released to the market recently, the company told us that if the Vodafone merger had occurred on 1 January, revenues would have come in at $2.71 billion for the 6 months ending 30 June 2020, with earnings at $918 million. If we annualise TPG's earnings (which is a little bit shonky, I know), TPG comes in with a P/E ratio of 19.74. By comparison, rival Telstra Corporation Ltd (ASX: TLS) is currently being priced at a market capitalisation of $33.84 billion with full-year revenues of $23.71 billion and earnings of $8.9 billion, which gives Telstra a P/E ratio of 18.57.
That tells us that the market is more or less pricing these 2 companies at a similar level compared to their underlying earnings.
TPG or Telstra?
So why would an investor go for TPG over Telstra shares, for example? More growth? I happen to think Telstra's mobile network (the only division making telcos any money these days) is far superior to the new TPG's one and is likely to attract more customers when 5G technology comes into the mainstream.
More income? Although TPG shareholders were treated to a whopping special dividend of 51.6 cents per share on the completion of the merger, this was largely funded by debt. It is unclear what kinds of dividends the company will be paying going forward. It has got a high benchmark though — on current prices, Telstra's reaffirmed 16 cents per share gives the company a trailing yield of 5.65% today.
Foolish takeaway
Whilst I think TPG is a great business, I would prefer to invest in Telstra myself if I wanted exposure to an ASX telecom company. There are a few things that aren't really clear just yet for TPG, including a full-year set of numbers to analyse and any kind of dividend guidance. As such, I would go with the devil you know and stick with Telstra if you want in with this space.
