We believe TPG Telecom (TPG) is highly leveraged to a post-pandemic recovery.
With international borders reopening, we expect growth in subscribers, and improved mobile pricing due partly to a recovery in roaming revenue.
We also expect TPG to progress the sale of the company’s tower assets in 2022, which we estimate could add up to $0.75 per share to our net present value (NPV) estimate.
Over the past three months, the TPG’s share price has declined 15% versus the S&P/ASX 200 Index, which is up 2%. This underperformance now means the stock is trading well below our valuation.
Ord Minnett has upgraded the recommendation on TPG from Hold to Buy and raise our target price to $7.45 from $6.80 on the basis of: 1) earnings growth driven by improved mobile contribution; 2) the potential for better capital returns as the balance sheet deleverages; and 3) valuation with the stock trading well below our NPV.
- COVID-19 recovery – Compared to peers, TPG has been disproportionately affected by the closure of international borders. The company’s competitive advantages are 1) its international brand, which attracts immigrants and travellers, and 2) its competitive international roaming offer, which is attractive for Australian residents travelling overseas. We forecast TPG will stabilise its post-paid subscriber numbers in the June 2022 period before returning to growth in the December 2022 half. We have also forecast average revenue per unit (ARPU) gains of $2/month from the return of international roaming, which will add $75–85m annually in pre-tax earnings.
Sale of tower assets – TPG has followed Telstra and Optus by announcing plans to sell tower assets. The company has 5,800 mobile sites and owns passive infrastructure at 1,200 of those sites. Given the majority are in metro locations, we expect tenancy rates to be higher than Telstra’s. Therefore, we have applied a premium multiple of $1.1m per site to arrive at a valuation of $1.3bn. Assuming all of the passive sites are sold and the proceeds are used to buy back shares, we estimate a transaction could be $0.75 per share accretive to our NPV.
- Dividends – We forecast TPG will reach its target net debt to operating earnings ratio of 2.0x by December 2022. With the balance sheet rapidly deleveraging and free cash flow yield forecasts of 7% in CY23 and 8% in CY24, we believe there could be scope for greater capital returns. TPG’s dividend policy is currently based on a payout ratio of at least 50%, which leaves options for higher dividends going forward.
Troy Derwin is an Authorised Representative (no 435773) of Ord Minnett Ltd, AFS licence 237121. This article contains general financial advice only. Troy can be reached on 07-54304444 or tderwin@ords.com.au.
