The path to growth
TPG Telecom (ASX:TPG) shares have been staging a recovery since taking a hit earlier in the year after the highly regarded former Chairman David Teoh announced a surprise departure. It was unexpected given he had built the TPG Telecom business from the ground up and led it to the multi-billion merger with Vodafone Hutchison and announced his departure far quicker than expected.
In a letter to shareholders Mr Teoh outlined his reasons to shareholders saying it was the “right time” for him to exit the company with the Vodafone Hutchinson Australia merger complete. While we felt there may have been other reasons for the exit, Mr Teoh is known as a private person and no more details have emerged. We have a huge amount of respect for Mr Teoh and his achievements and with his strategic vision being executed we believe the investment case for TPG Telecom remains sound after the merger.
The May AGM (Annual General Meeting) was the first time Chairman Canning Fok addressed TPG shareholders in that position and along with opening remarks, recapping financial performance, noting a commitment to sustainability and the usual issues such as board renewal and remuneration among others, he outlined the strategic priorities for the company before closing remarks and turning it over to CEO Iñaki Berroeta for more detail.
The strategic priorities were most importantly to “continue to roll out 5G and modernise” the mobile and fixed networks. He also noted that the company was seeking to “maximise the use of our own infrastructure, grow share in the Enterprise sector and deliver a target of $70 million in cost synergies this year alone.”
CEO Iñaki Berroeta emphasised that the 5G mobile network had been accelerated, with services available in more than 500 suburbs in cities and major centres with more than half a million customers using 5G mobile devices on the company’s networks. TPG is on track for 85% population coverage in the top six cities by the end of the year.
Mr Berroeta noted that TPG (ASX:TPG) had secured spectrum holdings in all available licence areas at a recent millimetre wave auction, significantly increasing capacity for the company’s fixed wireless and 5G mobile services. The existing 4G and 5G network is highly rated for its video experience, which is increasingly the type of experience users are seeking. The company has launched a 5G fixed-wireless product that we think holds significant promise given the company’s background. This will be key to offsetting continued headwinds from the NBN and the introduction of the Regulatory Broadband Scheme levy.
We expect TPG to continue to take market share in the broadband space and the overall mobile market to improve on higher prices. We note both Telstra and Optus have already lifted prices and the ARPU in the market is set to rise as the telcos seek to extract the required returns from heavy investment in 5G. TPG hasn’t lifted its pricing to be in line with Telstra and Optus yet, which we believe has limited the recovery in the shares. The company has removed Covid-19 discounts but when considering bonus data packages its prices remain lower than its big rivals for now. This is a lever it can pull down the track.
Source: TPG Telecom (ASX:TPG)
TPG is seeking to become a bigger player in the enterprise market, leverage its infrastructure for the broadband market and better leverage its brands.
Source: TPG Telecom (ASX:TPG)
Besides the pricing lever, there is a cost-out story with the company targeting around $70 million in direct synergies flowing from the merger in 2021, which excludes the contribution from fixed wireless services and revenue synergies from cross-selling. There should be more to follow in subsequent years with a $125 million to $150 million synergies target from operating costs by 2023. TPG (ASX:TPG) also estimates that it could save around $50 million per year for every 100,000 customers it can seduce off the NBN and onto its own infrastructure. With solid cash flow generation we expect dividends to rise over time as the two companies tighten their integration.
We continue to recommend TPG Telecom (ASX:TPG) as an above-average risk, long-term buy for Members without exposure.
