5G Investments And Optus Agreement Will Expand Market Coverage And Reduce Costs

Key Takeaways

• TPG Telecom's focus on cost efficiency and business simplification is expected to slow OpEx growth and improve net margins.
  
• New contracts, 5G investments, and a regional sharing agreement with Optus aim to sustain revenue growth and expand market reach.
  
• Intense competition and rising costs in mobile and NBN markets, along with operational challenges, pressure TPG Telecom's revenue, margins, and growth projections.

Catalysts

Provides telecommunications services to consumer, business, enterprise, and government and wholesale customers in Australia.

• TPG Telecom's increased focus on cost efficiency, including operational efficiencies from employee reductions and business simplification programs, is expected to slow overall OpEx growth and improve net margins.
  
• The successful migration of Lyca Mobile and a new MVNO contract, along with TPG’s focus on maintaining strong mobile service revenue growth despite market challenges, will likely sustain and potentially increase future revenue streams.
  
• Continued growth in the mobile service revenue driven by refreshed competitive plans and monetization of increased consumption following 5G network investments is expected to positively impact earnings.
  
• The proposed regional sharing agreement with Optus is anticipated to significantly expand market reach, reduce investment costs, and improve earnings through reduced churn and increased coverage.
  
• Business simplification initiatives are predicted to deliver cash benefits and improve TPG's financial position by enhancing EBITDA and reducing CapEx, potentially boosting future EPS and net margins.

TPG Telecom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TPG Telecom's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 3.1% in 3 years time.
• Analysts expect earnings to reach A$181.0 million (and earnings per share of A$0.09) by about February 2028, up from A$30.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$92 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.6x on those 2028 earnings, down from 273.1x today. This future PE is greater than the current PE for the AU Telecom industry at 43.8x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.88%, as per the Simply Wall St company report.

TPG Telecom Future Earnings Per Share Growth

Risks

• Intense competition in the mobile and NBN markets, such as aggressive discounting of handsets by competitors, could pressure TPG Telecom's revenue and margins.
  
• Slower growth in mobile subscribers, exacerbated by factors like international arrival slowdowns and 3G network shutdown, may affect future revenue growth projections.
  
• Continued difficulty in stabilizing the fixed broadband subscriber base amidst a commoditized NBN market and rising network costs could impact net margins.
  
• Rising operating expenses, driven by inflation and investments in modernization, could reduce net earnings if efficiencies aren't realized as planned.
  
• The potential introduction of new levies on fixed wireless access could increase operational costs and affect profit margins.

Valuation

• The analysts have a consensus price target of A$5.087 for TPG Telecom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.4, and the most bearish reporting a price target of just A$4.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$5.9 billion, earnings will come to A$181.0 million, and it would be trading on a PE ratio of 61.6x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of A$4.42, the analyst price target of A$5.09 is 13.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.