Does TPG Telecom Limited’s (ASX:TPM) PE Ratio Signal A Selling Opportunity?

TPM’s current PE is a low 12.64x based on past earnings, slightly lower than the 21.78x average multiple of the Telecom. However, a static multiple such as PE is never conclusive on its own. This is because there are many company-specific factors like future prospects and capital structure, which are unaccounted for. Below, I will lay out some important considerations to help determine which multiple best suits TPM. Let’s dive in.

Is TPM making any money?

The PE multiple is useful for when a company is profitable, which is the case with TPM. This is because the multiple is not applicable to companies that are not generating positive earnings. Other useful measures can be employed to evaluate companies in this situation, such as price-to-free-cash-flow or price-to-sales where it is suitable. Historically, TPM has always managed to produce positive profits for investors. As earnings forecasts indicate the positive trend will continue, the PE multiple can be an acceptable tool to assess the TPM’s value, but let’s see if there is a better alternative.

ASX:TPM Future Profit June 21st 18
ASX:TPM Future Profit June 21st 18

Is TPM in a lot of debt?

Yes. As a rule of thumb, debt shouldn’t exceed 40% of equity. Currently, ’s 56.13% debt-to-equity ratio indicates its financial positioning is not optimal. This ratio indicates that for every A$1 you invest, the company owes A$0.56 to debtors. This can be risky, given that in the event of bankruptcy, these debtors receive the first claim on the assets of the company.

ASX:TPM Historical Debt June 21st 18
ASX:TPM Historical Debt June 21st 18
You may be wondering how debt impacts an equity valuation. Well, the company’s share price theoretically represents the value of its equity portion only. However, it’s crucial to account for debt as well, since using leverage alters the capital structure, and influences the risk and performance of the business. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple.

TPM’s EV/EBITDA = AU$6.45b / AU$0 = 7.72x

TPM’s multiple appears undervalued when likened to the industry’s average of 7.72x, but at a more sobering tone than suggested by the PE ratio.

Will TPM experience high growth?

Quite the opposite. Given that net income is forecasted to diminish by -23.08% each year for the next 5 years, ’s growth outlook is an adverse one. However, current earnings don’t reflect any of this potential decline in the future, which is a setback for trailing multiples. You should pay for what you’re going to get, not what’s already happened. Let’s adjust our previous multiple for future expectations by using projected EBITDA for the next year.

TPM’s forward EV/EBITDA = AU$6.45b /AU$807.66m = 7.99x

TPM is appropriately valued when comparing its multiple to the 8.3x industry average. which differs from the overvaluation TPM’s past EV/EBITDA ratio suggested.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ‘s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.