Network Sharing With Optus Will Double Coverage And Expand Market Reach

Key Takeaways

• Network expansion through regional sharing with Optus increases market reach, driving potential revenue and market share gains.
  
• Business transformation and strategic agreements increase cost efficiencies, reduce CapEx, and improve margins, supporting financial growth.
  
• TPG's strategy shift away from fiber assets and intense market challenges risk revenue growth, with reliance on partnerships exposing it to dependency risks.

Catalysts

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

• The regional network sharing implementation with Optus has more than doubled TPG's mobile network coverage, significantly expanding their addressable market. This expanded coverage is expected to drive market share gains and enhance revenue growth potential through new customer acquisitions and increased data traffic. This should positively impact revenue.
  
• The business transformation, which includes the simplification of plans, modernization of IT systems, and increased digital sales capabilities, is expected to create further cost efficiencies, helping to enhance EBITDA margins and improve overall net margins.
  
• The strategic review and subsequent agreement with Vocus will strengthen TPG's financial position by providing cash proceeds, eliminating future capital expenditures related to fiber, and securing cost-effective network access. This improved capital efficiency is anticipated to positively impact earnings, particularly through reduced CapEx and enhanced cash flow.
  
• The focus on fixed wireless services and further 5G rollout is expected to increase the margin from TPG's own network, allowing for higher profitability in their fixed broadband business. This initiative is likely to bolster both revenue and gross margins.
  
• Ongoing simplification and modernization efforts in IT and customer experience, with targets for digital sales growth and reduced churn, are expected to enhance operational efficiency, supporting EBITDA growth and ultimately driving improvements in earnings per share (EPS).

TPG Telecom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TPG Telecom's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.9% today to 4.3% in 3 years time.
• Analysts expect earnings to reach A$255.3 million (and earnings per share of A$0.14) by about April 2028, up from A$-107.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$342 million in earnings, and the most bearish expecting A$120 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.4x on those 2028 earnings, up from -84.9x today. This future PE is greater than the current PE for the AU Telecom industry at 39.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

TPG Telecom Future Earnings Per Share Growth

Risks

• The sale of TPG's fiber business to Vocus shows a shift in strategy away from fiber assets due to their low growth potential and subscale operations, indicating a future reliance on partnerships that could expose the company to dependency risks, potentially affecting future margins.
  
• TPG faces intense competition in the NBN market, leading to a reduction of 84,000 fixed broadband subscribers, which demonstrates challenges in maintaining revenue growth in a highly competitive environment.
  
• External factors such as a 25% decrease in international migration and student intake have negatively impacted postpaid subscriber numbers for TPG, which could hinder revenue growth if these trends persist.
  
• The regional network sharing implementation with Optus and market expansion plans pose execution risks, especially considering the initial EBITDA impact of $55-65 million and costs accruing before revenue realization, affecting earnings in the short term.
  
• The proposed sale of fiber and EEW fixed business to Vocus is subject to regulatory approval, which introduces uncertainty; any delays or rejections could disrupt TPG's capital and cost efficiency plans, impacting operating margins and cash flows.

Valuation

• The analysts have a consensus price target of A$5.108 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$255.3 million, and it would be trading on a PE ratio of 44.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of A$4.9, the analyst price target of A$5.11 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.