Another telco adjusts to structural shift in the sector
Page 1 of 1
Morningstar's fair value estimate for this price-leading telco has been revised down 15 per cent, as Australian players gird their operations while the National Broadband Network roll-out ramps up.
This week's TPG Telecom (ASX: TPM) annual general meeting reiterated management's previous earnings before interest, taxes, depreciation and amortisation (EBITDA) outlook for fiscal 2017, but concerns about the revenue effect of NBN have increased.
As a result, Morningstar's fair value estimate has been dropped to $8.50 per share, down from $10. This brings it in line with competitor Vocus Communications (ASX: VOC), which also recently saw a reduction in fair value, albeit a more modest drop of 5 per cent.
"The higher NBN access costs [of around $40 per month per subscriber] could reduce TPG's EBITDA base by up to 25 per cent when the NBN is largely rolled out by the end of fiscal 2020," says Brian Han, senior equity analyst, Morningstar.
TPG is particularly vulnerable on this front, with almost 70 per cent of its broadband subscribers currently using the company's own infrastructure--meaning it pays access costs of between $13 and $18 per month per subscriber.
While this has been a significant positive for the business, the levelling effect of the NBN, which will see all Australian telcos switch to the NBN's fibre infrastructure, will erode much of TPG's existing price advantage.
In addition to reducing its fair value estimate, Morningstar has also upgraded the fair value uncertainty rating on the company to high, from medium.
"It is time to recognise the fundamental change the NBN will inflict," says Han, despite the mitigating effects of "snaring a greater share of the regional broadband market ... and continuing growth in the corporate market."
In addition to a greater focus on its regional broadband and corporate channels to help offset tightening margins due to the NBN, TPG has also announced plans to expand into Singapore's mobile telephony market.
"We are ambivalent, to say the least, about this venture ... while we are hesitant to underestimate TPG, the Singaporean mobile market appears to be a whole different competitive landscape than when TPG first entered Australia, when broadband was still at an embryonic stage," says Han.
On the upside, he emphasises Morningstar's long-term assumptions of 10.5 per cent revenue growth for TPG's consumer broadband division, and 8 per cent corporate division revenue growth.
TPG also retains its narrow moat rating, which remains stable for at least the medium term, though Han suggests this may change as the full roll-out of the NBN draws closer in the next two or more years.
Overall, he believes the company "is well positioned for the impending structural change in the domestic telecommunications industry".
This hinges largely on the roll-out of the NBN further boosting consumer take-up of high-traffic products such as internet protocol television, which will in turn increase demand for broadband.
More from Morningstar
Glenn Freeman is Morningstar's senior editor.
© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.