TPG Telecom Ltd (ASX: TPG) shares are having a tough start to the month.
In afternoon trade, the telco giant's shares are down almost 2.5% to $4.64.
This means that its shares are now down 17% over the past 12 months.
What's going on with this ASX 200 stock?
Investors have been hitting the sell button today after the company was the subject of a bearish broker note out of Goldman Sachs.
According to the note, the broker has downgraded the telco's shares to a sell rating with a reduced price target of $4.35.
Based on its current share price, this implies further potential downside of 6.3% for the ASX 200 stock.
Why did Goldman downgrade TPG?
Goldman has been busy reviewing the telco sector and continues to see Telstra Group Ltd (ASX: TLS) as the best option for investors. This is followed by Spark New Zealand Ltd (ASX: SPK), which it upgraded to a neutral rating this morning.
Commenting on the sector, the broker said:
The ANZ telcos' share prices have been under pressure in CY24, impacted by negative earnings revisions and headline multiple compression (12mf EV/EBITDA) of c.8% YTD, underperforming global peers (c.2%). Earnings revisions reflect higher interest and spend optimization in Fixed Enterprise, given more challenging macro environments. However, we remain positive on the sector's growth outlook, given its key drivers – mobile and infrastructure – continue to deliver and are resilient to any further macro slowdown. This supports attractive and sustainable (SPK, TPG) to growing (TLS) dividends.
Goldman highlights that Telstra and Spark look cheap in comparison to TPG. It said:
Our sector preference remains Telstra (Buy), but with Spark now trading c.2 std cheap vs. history, following its YTD underperformance, we upgrade to Neutral (from Sell). Consequently, we downgrade TPG to Sell (from Neutral) as our least preferred ANZ telco. We lower earnings for TPG (EPS -9% to -13%) and SPK (-4% to -3%) reflecting c.1% EBITDA downgrades (fixed-line) and higher interest expense (delayed AU rate cuts).
Its analysts also have concerns over the ASX 200 stock's higher than expected operating expenses, among other things. They add:
Our preference for SPK over TPG reflects: (1) SPK's long track record of successful execution in mobiles, FWA and opex control, in contrast to TPG which has seen higher than expected opex growth in recent years; (2) greater cash flows and balance sheet optionality at SPK (FY24E ND/EBITDA of 1.1x vs. TPG 2.1x) allowing for capital mgmt./infra investments; (3) SPK's FY24E dividend yield of 6.5% (FS) is the highest in the sector; and (4) its NTM EV/EBITDA discount vs. historical trading multiples is greater than TPG's. However, TPG has upside risks, including: (1) potential M&A, noting the Vocus bid in Aug-23, and Vision Network strategic review since Oct-22; (2) successful execution on its transformation program ($140mn cash savings by FY27).
Overall, Goldman says buy Telstra over TPG shares right now. It has a buy rating and $4.30 price target on them.
