Regional Network Expansion And Digital Brands Will Drive Stronger Telecom Performance

Catalysts

About TPG Telecom

TPG Telecom is an Australian telecommunications provider offering mobile, fixed broadband and wireless connectivity services nationwide.

What are the underlying business or industry changes driving this perspective?

• The once in a generation regional network expansion has more than doubled TPG Telecom's mobile coverage, materially narrowing historic coverage gaps and positioning the company to keep gaining market share from incumbents, driving sustained service revenue and EBITDA growth.
• Rapid adoption of digital first subscription brands such as TPG and Felix is reshaping the customer base toward lower cost to serve, set and forget mobile plans that support attractive margins and scalable earnings as volumes rise without a proportional lift in operating expenses.
• Substantial free cash flow tailwinds from structurally lower CapEx after the 5G and IT modernization peak, combined with the unwind of legacy handset financing and lower spectrum payments, create capacity for growing dividends and faster net profit expansion.
• The shift to higher speed fixed broadband, including NBN speed boosts, Fiber Connect uptake and leadership in fixed wireless, supports rising ARPU and improved gross margins in the fixed business, underpinning healthier group revenue and earnings mix over time.
• Balance sheet transformation through multi billion dollar debt repayment and lower financing costs, alongside disciplined OpEx targeted to remain broadly flat in nominal terms to 2029, enhances return on invested capital and allows a higher share of revenue growth to fall through to net margins and earnings per share.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on TPG Telecom compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming TPG Telecom's revenue will grow by 4.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.0% today to 4.9% in 3 years time.
• The bullish analysts expect earnings to reach A$281.7 million (and earnings per share of A$0.15) by about July 2029, up from A$52.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$182.6 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 46.5x on those 2029 earnings, down from 136.6x today. This future PE is lower than the current PE for the AU Telecom industry at 61.3x.
• The bullish analysts expect the number of shares outstanding to grow by 5.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The iiNet cyber incident highlights ongoing exposure to data security and systems risk, and any repeat event or broader systems disruption could damage brand trust, drive customer churn and require remediation spending, which may pressure service revenue and net margins over time.
• TPG is leaning heavily into digital first, app based and online channels while simultaneously simplifying and migrating legacy IT and billing platforms. Any misstep in large scale customer migrations or platform stability, such as order management failures, could trigger higher churn, credits and support costs, undermining EBITDA and earnings growth.
• Fixed broadband operates in a structurally crowded NBN resale market with aggressive challenger pricing and non telco entrants. If competitive intensity persists or accelerates as NBN speed boosts roll out, TPG may be forced to prioritize profitability over volume for longer, which could limit fixed revenue growth and weaken the convergence led ARPU story at group level.
• The capital management plan and reinvestment scheme assume continued strong domestic cash generation, disciplined OpEx and stable macro conditions. Any combination of weaker mobile growth, slower free cash flow uplift or higher than expected lease and access costs could constrain future dividend growth and reduce the upside to earnings per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for TPG Telecom is A$4.7, which represents up to two standard deviations above the consensus price target of A$4.12. This valuation is based on what can be assumed as the expectations of TPG Telecom's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.7, and the most bearish reporting a price target of just A$3.5.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be A$5.7 billion, earnings will come to A$281.7 million, and it would be trading on a PE ratio of 46.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$3.64, the analyst price target of A$4.7 is 22.6% 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.