Australia | Sep 21 2016
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TPG Telecom's surprisingly weak guidance has some, but not all, brokers worried.
-Earnings per subscriber to decline as NBN rolls out, expected to be offset by subscriber growth
-Acquisition and retention costs from NBN occurring earlier than previously expected
-Potential for another leg of long-term growth if Singapore licence bid successful
By Eva Brocklehurst
TPG Telecom ((TPM)) has issued its usual conservative guidance in updating its FY17 outlook, but this has not stopped some brokers being disappointed. Organic growth is strong, from both the consumer and corporate segments, but pressures from the rolling out of the National Broadband Network (NBN) are mounting.
Citi expects the guidance will be upgraded at the first half results and envisages near-term NBN costs will be more than offset by subscriber growth, and iiNet acquisition synergies. The broker's forecast for FY17 EBITDA (earnings before interest, tax, depreciation and amortisation) is $850m, 3% above the top of the company's guidance. Citi calculates that over FY11-15, the company's average guidance upgrade at the half year announcement was 6% and the final outcome beat initial guidance by an average of 8%.
NBN charges will rise slowly, the broker believes. The company had 15% of its subscribers on the NBN in July and by FY17 end this should hit 24%, with 100% by FY21. Average access costs are expected to rise to $19, or thereabouts, in FY17 from $15.50 per month in FY16, ending up near NBN's forecast for average revenue per user (ARPU) of $57 in FY21.
Citi expects EBITDA per subscriber will decline by around 50% but be almost entirely offset by subscriber growth. Meanwhile, mobiles are a clear focus for the company, via regional spectrum acquisitions in Australia, and the company intends to bid for the fourth licencee in Singapore. This has potential to add another leg of growth in the long term.
The reason Macquarie is disappointed stems from the fact there are a number of factors in FY17 which should drive higher growth, including a full year of iiNet ownership and the benefit of lower copper access pricing. The broker also envisages upside from the take up of fibre-to-the-building (FTTB) services
Incorporating these factors implies that the company's core broadband EBITDA is down by $15m and Macquarie interprets this as a further deterioration in the EBITDA per subscriber. The broker suspects the impact of acquisition and retention costs from the NBN is occurring earlier than previously expected and this is in addition to the pressures on gross profit and margins the NBN is bringing.
In terms of the opportunity in Singapore, the broker notes there is strong regulatory support for a fourth player and if TPG is successful in getting pre-clearance for the auction it will be aggressive in setting up its local management team, funding the investment from debt and cash from the Australian business. This is considered the next catalyst, with an update due on the auction process in the December quarter. Macquarie believes the stock's trading multiples will remain under pressure until there is further clarity on the medium term and retains a Neutral rating.
Deutsche Bank, in initiating coverage of the stock with a Buy rating, has a positive outlook based on forecasts of 13% compound earnings-per-share (EPS) growth over the next five years. This should stem from NBN-led market share gains and growth in high margin FTTB services. The broker expects TPG's overall broadband market share to increase to 29% in FY20 from 27% in FY15. Group margins are forecast to fall in FY17 and then steadily expand as the higher margin services are sold.
Guidance disappoints Credit Suisse too. The broker considers the outlook a reality check on the extent of the earnings pressure the company faces as the NBN rolls out. This headwind will stiffen in FY18 and FY19 and the broker forecasts a compound EPS growth rate of just 2.5% over the next four years. Credit Suisse also suspects market share has slipped in the second half of FY17, reflecting increased competitive intensity, particularly from Telstra ((TLS)).
Average revenue per unit (ARPU) is expected to come under increasing pressure as well, as TPG's base moves onto new lower-priced plans and the uptake of voice call bundles declines. Credit Suisse calculates TPG faces a $200m EBITDA headwind in consumer business as the subscriber base migrates to NBN.
The broker believes the stock's price/earnings multiple in FY17 is still relative high at 20.7x, given the weaker earnings growth now forecast as well as the high risk profile of consumer broadband. The stock is trading at a significant premium to Vocus Communications ((VOC)) and Credit Suisse retains an Underperform rating.
Morgans takes up a similar stance, downgrading to Reduce from Hold. The broker finds it hard to dismiss the advancing headwinds and lowers its earnings estimates and terminal value for the stock because of margin pressure. The main risk/reward relates to the company's ability to offset the NBN margin and therefore the reductions to earnings.
NBN is now the main feature of the industry and, as the addressable market more than doubles in FY17, Morgans believes the impact will become increasingly obvious. The broker believes the company needs to either double its customer numbers, bypass the NBN using wireless spectrum, or cut costs to offset the pressure. In sum, a period of structural change and intense competition makes profitable growth hard to come by.
Morgan Stanley is a little kinder in its analysis, highlighting the company's track record of issuing conservative guidance and meeting or exceeding it. Still, the broker is aware of the rising competition in retail broadband that increases the risk profile around future growth but notes this is the case for all participants.
FNArena's database shows three Buy ratings, two Hold and two Sell. The consensus target price is $10.32, suggesting 14.7% upside to the last share price. This target compares with $11.54 ahead of the results. Targets range from $7.49 (Morgans) to $13.35 (Citi).
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