Grow like 5G speed
Investors have not responded well after TPG Telecom (TPG) revealed a thinner than expected full-year result, despite delivering growth in targeted services such as fixed wireless, 5G network rollout and cost synergies. However, TPG declared a boost in its dividend to shareholders, despite a fall in profit. We saw a challenging COVID operating environment, but TPG navigated these headwinds well and positioned itself with strong financial management. Today, we review the result and provide our in-depth view on it.
FY21 Review
Compared to FY20 pro forma results, the total group revenue was down 3% to $5.3 billion, including $4.4 billion in service revenue, which was 4% down. Earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.7 billion was down 3%, as reductions in operating costs (Opex), driven by cost control and synergies realised, partially mitigated revenue impacts. This resulted in a 10.6% decline in net profit after tax to $110 million.
Source: TPG
Operating free cash flow was robust at $596 million, while free cash flow was improved to $410 million, due to working capital efficiencies and lower finance costs with lower interest rates.
Despite the tighter delivery of net profit, TPG still made a fully franked final dividend of 8.5 cents per share, significantly up from 1.0 cent per share in FY20. It will be paid to shareholders on 13 April. We expect a growing dividend stream in the future as TPG delivers on its strategic initiatives.
Furthermore, TPG maintained a strong capital position, with a net debt to equity ratio of 47%, broadly in line with FY20.
Moving to the business segments, in Consumer, service revenue declined 4% to $4.3 billion mainly due to a drop in mobile subscribers, but saw a net increase since November 2021, adding 33,000 subscribers, as international travellers began to return to Australia. EBITDA was down 8% to $1.2 billion accordingly.
TPG ended the year with 5.02 million mobile customers, 4% down primarily due to COVID restrictions on international travellers and aggressive competitor discounting of secondary brands and retail partner channels. This trend broadly aligns with the market, which we believe will improve in FY22 with international borders reopening.
Source: TPG
The decline in service revenue was partly offset by growth in fixed wireless broadband customers, reporting 80,000 new customers on its 4G and 5G home broadband services at the end of FY21, leading to a total fixed customer base growing 1.2% to 2.22 million. It reflected strong momentum in fixed wireless services for the working from home thematic during COVID. And we think with a more flexible work arrangement in the post-COVID era, we expect to see this momentum continuing in FY22.
In Corporate, revenue was impacted by a 1% decrease to $985 million, with growth in on-net fibre and NBN enterprise ethernet services but a decline in legacy copper-based services. Due to lower operating costs, EBITDA was up 6% to $492 million.
Several achievements that TPG has achieved during the FY21. It delivered what it described as its “best ever network” in 2021, rolling out 1,000 5G sites that can be accessed by 85% of the Australian population.
The company also achieved $71 million of cost synergies following its merger with Vodafone Australia in June 2020, eliminating third-party network expenditure and reduced duplication costs. And it is targeting a $150 million synergetic value in 2023, upgrading from the early delivery of $125 million. It shows management’s confidence, and we believe they will achieve it as we are seeing the headwinds of the past two years now lessening.
Outlook
FY22, we see it as being very optimistic. With easing constraints on international travel, more travellers and students are returning gradually, which will lift the numbers of mobile subscribers in the Consumer segment. Importantly, margins can be also more stabilised and recover as consumer uptake when the 5G rollout accelerates. We see TPG’s 5G rollout target by 2025 is to reach 99% of the Australian population.
With a target to provide a lower-cost alternative to NBN to consumers, TPG aims for a more than double uptake of fixed wireless services to 160,000 subscribers. A strategic review of towers and rooftop infrastructure – the Tower sale is close to completion that will free up capital and future cash flows.
Source: TPG
In the Corporate segment, TPG will continue to grow its margins in both Enterprise and Wholesale businesses. TPG has recently signed a 10-year mobile operator core network agreement with Telstra Corporation, which will provide TPG with access to 3,700 of Telstra’s mobile network assets, subject to ACCC approval. We see this as a game-changer for TPG.
Strategically, TPG has been executing its three priorities effectively. ‘Integrate and Simplify‘ will continue to drive the company with a lean integrating model. ‘Win Smart’ is leading TGP with an ambitious goal of upgrading another 1000 plus 5G sites. “Maximise Potential” is developing an efficient and scalable business model that enhances TPG’s competitive position in the telco industry. We see this strategy will lead TPG into further developments in divestments, collaborations, and acquisitions.
To seize more market share in the telco industry, TPG will need to build up reliable network recognition, navigate industry competition & market disruption, ensure cyber security & data protection, and maintain technology stability and resilience. A long journey ahead.
Summary
TPG Telecom’s full-year results showed that the ‘win-win’ value from the merger with Vodafone gradually became effective. We expect to see more synergistic values come to the table as management predicted. Strategic divestments and collaboration will also bring more value to TPG. COVID disruptive headwinds are easing, and we can see a big jump in its top line and growth in margins.
Consequently, we recommend TPG Telecom as a high risk, long-term buy for Members without exposure.
Disclosure: Interests associated with Fat Prophets hold shares in TPG Telecom (ASX. TPG).
