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TPG Telecom – Momentum undisturbed

Two things have changed in recent weeks for TPG but the company has reiterated its FY15 earnings guidance nonetheless. This stock isn’t cheap but its earnings momentum is worth buying.


Firstly, the government’s response to the Vertigan review has put a spanner in the works for TPG’s FTTB (fibre to the building) plan.


Let’s be clear: TPG’s FTTB plan is the cream on its business pie and is not the basis of its entire business. In that context, the introduction of a levy on high speed broadband businesses and the prospect of some form of separation to allow wholesale access to its business appears to have slowed TPG’s progress a little.


TPG was doing nothing illegal by building an FTTB network in apparent competition to the NBN which was supposed to be a monopoly. TPG was simply utilising a loophole which has now been tied off.


It’s not entirely clear how TPG will adapt to the new rules but it seems that progress has merely been hampered rather than halted. It will now need to recalculate the economics of the targeted 500 building project incorporating the potential separation costs and imposed levy. It may decide that the project is no longer financially worthwhile. We will have to wait for clarification from the company.


TPG reiterated its earnings guidance for FY15 at its recent annual shareholders meeting with EBITDA of $455-460m expected, growth of at least 25% over FY14. The current year will include a full year contribution from AAPT.


On the sidelines, investors should also keep an eye on the standoff between TPG and the Vocus bid to take over Amcom Telecommunications. TPG has a 5.43% stake in Amcom and therefore a seat at the table. Amcom is a smaller version of TPG with a skew towards Perth, Adelaide and Darwin so we are not surprised that TPG has closely watched this company for a long time. Vocus has stirred things up by bidding for AMM but quite where it ends is not yet clear.


A shorter term issue is the addition of TPG Telecom into the ASX100 index which means many small cap funds will no longer be able to hold the stock as it departs the small cap index. That change may have contributed to the short term share price weakness for TPG but it presents an opportunity for index agnostic investors to buy the stock.


The fundamental business case of TPG Telecom has not changed. It owns a substantial fibre-optic network across Australia and also internationally. TPG has positioned itself as a strong second tier carrier with a burgeoning consumer and corporate customer base. By owning much of its own network, TPG has been able to avoid the margin-busting interconnection and backhaul costs of passing its traffic through Telstra’s network.

In a market devoid of solid ideas, this one is a standout.

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