Tech Ventures And AI Partnerships Will Strengthen Future Operations

Key Takeaways

• The merger with Taiwan Star and consolidation of base stations are set to enhance cost efficiency and net margins.
  
• Strategic partnerships and tech ventures, alongside solid growth in mobile and broadband services, support robust revenue and earnings expansion.
  
• Integration of Taiwan Star has increased debt and risks, with shifts in consumer behavior impacting revenue growth in key segments.

Catalysts

Provides wireless communication services in Taiwan, Republic of China, and internationally.

• The completion of the merger with Taiwan Star tech and consolidation of 9,000-plus base stations are expected to produce significant cost savings in site rentals and related expenses, positively impacting net margins.
  
• Sustained revenue growth is anticipated in the Mobile business due to the strong year-over-year increase driven by both the addition of Taiwan Star users and organic growth of the existing user base, likely boosting future revenues.
  
• The Home Broadband business is generating robust revenue growth by upselling faster speeds and effectively cross-selling to mobile and Pay-TV customers, which should continue to support revenue growth.
  
• Future growth in the Telco+Tech businesses, such as Game Publishing and DCB, alongside high 5G upgrade rates and low postpaid churn, point to increases in the average revenue per user (ARPU) and mobile service revenues.
  
• Strategic partnerships to accelerate enterprise business expansion in the AI era and ongoing investments in tech ventures like momo are expected to strengthen earnings growth outside of the core telecommunication operations.

Taiwan Mobile Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Taiwan Mobile's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.1% today to 6.5% in 3 years time.
• Analysts expect earnings to reach NT$15.9 billion (and earnings per share of NT$5.32) by about December 2027, up from NT$14.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2027 earnings, up from 24.7x today. This future PE is greater than the current PE for the TW Wireless Telecom industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.93%, as per the Simply Wall St company report.

Taiwan Mobile Future Earnings Per Share Growth

Risks

• The integration of Taiwan Star has involved inheriting significant debt, increasing Taiwan Mobile's gross debt and net debt to EBITDA ratio, which could impact future financing costs and net earnings.
  
• Momo's revenue growth has been subdued due to a shift in consumer spending away from e-commerce towards travel and leisure, affecting revenue and net margins in this segment.
  
• The telecom sector's continued reliance on high 5G conversion rates and upselling tactics presents risks if consumer interest in upgrading diminishes, potentially impacting ARPU and telecom revenue growth.
  
• Taiwan Mobile's exposure to market fluctuations in online content and OTT services, particularly after the exit of Disney from Taiwan’s cable market, could affect revenues, especially if similar exits occur.
  
• Investments in new businesses and marketing expenses for momo have led to a decline in EBITDA margins, which could compress overall profit margins if not offset by gains in other areas.

Valuation

• The analysts have a consensus price target of NT$123.5 for Taiwan Mobile 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 NT$136.0, and the most bearish reporting a price target of just NT$103.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$244.6 billion, earnings will come to NT$15.9 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 4.9%.
• Given the current share price of NT$114.0, the analyst's price target of NT$123.5 is 7.7% 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.