The TPG Telecom Ltd (ASX: TPG) share price is pushing higher on Friday.
In morning trade, the telco company's shares are up 1% to $5.12.
Why is the TPG Telecom share price rising?
Investors have been bidding the Vodafone Australia operator's shares after it announced the launch of a new handset receivables financing structure.
According to the release, management believes the new structure will support competitive mobile phone handset offers to customers, release additional cash flow to the business, and improve capital efficiency on an ongoing basis.
It notes that the structure will see TPG sell eligible handset receivables to an off-balance-sheet Trust.
Under the arrangement, TPG will sell eligible handset receivables at a discount to face value, reflecting financing costs and credit risk. The sold handset receivables will no longer be recognised on the company's balance sheet as substantially all risks and rewards associated with those handset receivables will have transferred.
What are the benefits?
This is expected to deliver TPG a net benefit in free cash flow of approximately $600 million in FY 2025, with further free cash flow benefits in later years, and a material ongoing increase in its return on invested capital (ROIC).
TPG is expecting the new handset receivables financing structure to directly contribute an improvement in ROIC of approximately 40 basis points in FY 2025 and approximately 110 basis points in FY 2026.
But it won't stop there. The ROIC benefits are expected to increase from FY 2027 as capital efficiency arising from the handset receivables financing complements ROIC improvements from underlying earnings growth and lower capital expenditure.
Commenting on the new structure, TPG Telecom's managing director and CEO, Iñaki Berroeta, said:
Our customers value being able to pay for handsets through monthly interest-free payment plans as it lets them stay connected with the latest technology and spreads the upfront cost of the device. Establishing this innovative financing structure enables TPG to keep offering customers highly competitive deals on Apple iPhone, Samsung Galaxy and other handsets while deploying our shareholders' capital much more efficiently.
The facility is a first for our sector and is materially superior to prior handset receivables financing structures available in Australia. We wish to recognise the support of our banks and of Macquarie and the Trustee, The Bank of New York Mellon (BNY).
The company advised that it anticipates a net negative impact to statutory net profit after tax in FY 2025 of approximately $50 million. However, in future years, the net profit after tax impact will not be material as the benefit of reduced bank borrowings will occur for the full year, and the timing impact of the initial back-book sale will not recur.
