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TPG Telecom – Network Ninjas

High growth companies with earnings momentum and a good track record deserve a high multiple and TPG Telecom is consistently meeting this criteria.

The AAPT acquisition added 5 months of earnings and synergies to the FY14 result announced this week. TPG’s corporate division will now contribute roughly half of the company’s FY15 earnings and should surpass that in future years as it carves out a bigger share of the SME business in Australia.

TPG’s advantage is its lower cost base courtesy of its comprehensive fibre network infrastructure throughout the country and abroad. Throw in a good dollop of marketing and product tenacity and you have a recipe for rapid earnings growth.

The Vertigan review took the wind out of TPG’s 500-apartment fibre rollout plan but the outcome of the review has not curtailed this project. The government continues to dilly dally over how to deal with the so-called cherry-picking loophole in its NBN legislation that allows TPG to run fibre into buildings and win customers. But TPG remains confident it can continue.

The broadband customer base continues to grow and at nearly 750,000 subscribers is approximately 12% of the total retail broadband market.

The interesting point here is that TPG’s operating margin in retail broadband is roughly double that of iiNet not least because IIN’s carrier and network costs amounted to $546m in FY14 compared to TPG’s expense of $293m. TPG spent $33m on employees in its consumer division compared to IIN’s $156m in the same period, further explaining the margin difference.

The stock has quickly recovered from its Vertigan-induced $5.32 at the beginning of the year to sit around the $7.00 mark now. At that level, investors might wonder if the ship has sailed with a 25x FY14 PE ratio and 12x operating earnings multiple in its wake.

But TPG’s outlook remains rudely robust and it is for this reason that investors can still get on board.

Company earnings guidance for FY15 EBITDA is $455-460m reflecting a full year contribution from AAPT plus whatever growth it can pack in to the consumer and corporate divisions. Company guidance has generally been conservative.

Back in March when we wrote about the interim result, we mentioned TPG was mulling an IPTV service but hadn’t developed any solid plans. It is now getting more serious on this option with trials planned ahead of a bigger rollout. Details seem sparse at this point so we aren’t adding any value for this until some idea of the cost and strategy emerges.

Sharply priced products in bundles together with snappy execution will keep the earnings momentum going. The balance sheet is still conservatively geared at 28% even after the AAPT purchase so it won’t take long before cash flow knocks off that meagre amount of debt again. TPG is nudging up its dividend payments but this stock isn’t about income growth: it’s about earnings growth in a market that is itself growing.

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