Morningstar Best Ideas List: An undervalued play in telecom

--  |   11/05/2022 Text size  Decrease  Increase   |  
email_fwd
<p><strong>Emma Rapaport: </strong>Hello, and welcome to Morningstar. I'm Emma Rapaport, today joining us is Brian Han. He is an analyst in our equity research team. Brian, thanks for joining us.</p> <p><strong>Brian Han: </strong>Thank you.</p> <p><strong>Rapaport: </strong>So we're here today to diverse the Morningstar Best Ideas list. And you've put a stock on there a long time ago, but we're going to talk about it today, because you've come out with a new special report. So we're going to talk about TPG, and why you think it's the best idea. I want to go back just a couple of years the stock really hasn't seen that sort of post pandemic bounce that a lot of other stocks have. Can you talk to me about why this stock has been lagging? What are the sort of issues going on? And why doesn't the market have a lot of faith in this stock?</p> <p><strong>Han: </strong>Yeah, firstly, I think it's because the market always prefers to see the (whites) of the recovery before they invest. And I must admit, the recovery signs have been quite slow to come through in terms of subscribers and in terms of earnings. But as we do always at Morningstar, we look forward and the forward indicators to us are looking very good. And if you don't mind if we start the investment thesis. From the very first beginning, there have been two areas where TPG has been haemorrhaging earnings. One is COVID, as you said, they've lost about $120 million over the past couple of years due to COVID, the border closures, the restrictions on movements.</p> <p><strong>Rapaport: </strong>And is that primarily due to sort of customers that they have?</p> <p><strong>Han: </strong>Exactly. So we're talking about migrants, students, and travellers. And those are segments where TPG has a pretty big weighting in, so they have been disproportionately impacted by all these COVID restrictions. So that's $120 million that they lost over the past two years due to those factors. Another thing is just over the past two years, again $120 million has been lost to NBN. Because they were forced to migrate their own broadband customers on their own network to the NBN. So that cost them another $120 million. And the good thing is, these two areas, we think the earnings declines have bottomed because, first of all, on the NBN, I think they only have about $30 million of profit to lose. So I think we're bottoming out there.</p> <p>And in terms of COVID, as you know, I think life is going back slowly towards normal. And in fact, in the most recent March quarter, this company actually added about 70,000 subscribers. So that's first time increase in about six consecutive quarters of decline. So that's a good sign too. So you have two areas that have been haemorrhaging earnings sort of bottoming. And then now we can actually look forward to underlying earnings growth coming through for TPG. And there are several sources of that underlying earnings growth.</p> <p><strong>Rapaport: </strong>Just before we get to that I just want to ask you about the merger that happened with Vodafone. Has the company seen any cost savings or synergies from that happening over the last year or so?</p> <p><strong>Han: </strong>Yeah, so one of the sources of that underlying earnings growth is their synergy. So these two companies and when I say two companies, I mean TPG Telecom and Vodafone Australia, they merged. I think the completion of that merger was in mid-2020. And the cost savings have been coming through so much so that by the end of this year these two companies should generate about $150 million in synergies and cost savings. So that's one of the major sources of earnings growth that's coming through. But then, if we look at, for instance, the mobile market, just focusing on the mobile market. Since 2017, our mobile industry has gone through unprecedented mobile discounting. Everybody was chasing subscribers and market share at the expense of profitability.</p> <p><strong>Rapaport: </strong>So if I showed up and tried to get a mobile plan, everyone was competing for the lowest price.</p> <p><strong>Han: </strong>Exactly. And the worst thing is, you didn't even have to go and ask because somebody will do a major deal and then the rest of them will follow and before you know it, you can get a better deal elsewhere. So we had that for about four years since 2017. But that is now normalising, and the reason why it's normalising is because number one, the market leader Telstra finally said as a market leader, we are going to show that leadership and we are going to hold tight and that had a cascading effect on the rest of the market. And the second thing is there is an operator, there is a CEO who used to run TPG, who was renowned aggressor in terms of discounting. His name was David Teoh and he's now out of the picture. So that also had a stabilising impact.</p> <p>But the most important thing is, and this happens in every transition from 1G to the next. So as we transition from the current 4G to 5G, that also introduces rationality, simply because all these operators spent a lot of money building up the 5G infrastructure. And now, they want a return on that investment. So that will make the mobile market more rational. And in fact, there is already evidence coming through that rationality is returning. Telstra's mobile margins are improving (out of sight). Optus' average revenue per user is increasing very rapidly. And also TPG itself, as I said before, they are now gaining subscribers at reasonable prices.</p> <p><strong>Rapaport: </strong>So at this point, you don't think that the market has really recognised all these forces that you're talking about and push it across to the share price.</p> <p><strong>Han: </strong>Exactly. Because I think one thing is that there is a lot of market interruption in terms of the rising bond yields, and also rising interest and what that means for spending. So there's a lot of friction in the market. And in a recovery story like this, I think people say we want to see actual evidence of recovery before we invest in it. And we think we're smart enough to time our run just before the recovery really happens. Whereas we always look long term out, and we can see the recovery in two to three years time, and now is probably the time to buy it because the market has not recognised those recovery potential.</p> <p><strong>Rapaport: </strong>Just to play devil's advocate quickly, are there anything that you're concerned about, any sort of things that can go wrong here in your thesis?</p> <p><strong>Han: </strong>Yeah, I think the key thing is if somebody blinks and then starts discounting again, for whatever reason, one reason could be they might look at Telstra's leadership in 5G and 5G subscriber signups and they'll go, we're falling really behind. Why don't we cut prices and try to stem this market share losses to Telstra? And that will again have a cascading impact on the other two operators. So that's probably the key thing that I am worried about that will have a resurgence of price discounting. But apart from that though, I think the general increase in the interest rate, I think that will have a big impact on not just TPG securities, but the whole stock market because the price of money is going up. And I hate to say this as a fundamental analyst. But I don't think I am saying anything controversial in saying that falling interest rates has arguably been the single biggest driver of the stock market over the past decade or two. And now we're in an environment where those interest rates are going up. And that's going to have a very, very big disruption in the whole market. And that may obviously hurt.</p> <p><strong>Rapaport: </strong>Is it fair to say that broadband is an essential these days, you can't live without broadband services or mobile?</p> <p><strong>Han: </strong>Well, certainly, if you talk to my kids and my wife, they'll say they can't live without them. And certainly in this age of working from home it would be a challenge to be without broadband and mobile. Well, forget about it. I don't think anybody can live without mobile these days. So it has become an essential spending, and perhaps it will get swept up in that inflationary environment which would be good for this industry.</p> <p><strong>Rapaport: </strong>Right. And thank you very much for joining us and sharing your thoughts.</p> <p><strong>Han: </strong>Thank you, Emma.</p>

Video Archive...

Why are Coles, Woolworths and JB Hi-Fi tanking? Morningstar explains
19/05/2022  Local investors were spooked after US retail giants Target and Walmart plummeted overnight as rising prices hit margins and inventory.
Dan Kemp's best tip for successful long-term investing: Beware market narratives
19/05/2022  On his recent visit to Australia, Morningstar's global chief investment officer Dan Kemp talks investing narratives, confronting the growing list of reasons to be concerned about markets and sustainable investing.
What's driving the latest big drop in US stocks?
19/05/2022  Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.
Value strikes back: How to manage style in your portfolio
18/05/2022  One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?
Is it time to recession-proof your portfolio?
11/05/2022  Here's what investors who are worried about a recession should consider today.
Morningstar Best Ideas List: An undervalued play in telecom
11/05/2022  Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.
Bill Browder: A scared Putin will only escalate the conflict
29/04/2022  Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine
5 risks facing the US market right now
28/04/2022  Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.
Buffett and Berkshire in 2022
27/04/2022  Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.
Fair value upgrades on the table: Morningstar resources update
31/03/2022  Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.
Bank outperformance speaks to positive trajectory: Morningstar
30/03/2022  Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.
Stock vs stock: Netflix and Disney
28/03/2022  Where are entertainment and streaming services headed?
Morningstar Best Ideas List: WiseTech looks cheap after tech selloff
24/03/2022  Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.
First fires, then floods: How listed insurers are weathering extreme events
23/03/2022  Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.
Don't get 'whipsawed' by false promises of peace in Europe
17/03/2022  Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls
Morningstar Best Ideas List: Kogan to hold own in faceoff with Amazon
15/03/2022  Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.
"There's been a big rotation in markets": Value surges as growth stumbles
08/03/2022  Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.
Afterpay's rivals set for battle with rates and regulators
03/03/2022  Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.
Industry champions on the cheap: Emerging markets at the Morningstar Investment Conference
23/02/2022  Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.
The Russia crisis is heating up, but you need to stay cool
23/02/2022  A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.
Peter Warnes on FAANGs, investing in Asia and bond market smoke signals
15/02/2022  In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.
Weighing up Magellan Financial Group after Douglass surprise exit
13/02/2022  Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.
Year of the Tiger: What's next for Chinese stocks
31/01/2022  The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead. 
What to do (and not do) in a volatile market
23/01/2022  Christine Benz discusses how investors should handle the turmoil, whatever the life stage.
Bare shelves only a short-term hit to Coles and Woolies
18/01/2022  Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul. 
Morningstar's outlook for 2022
17/01/2022  Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.
Morningstar's Year in Review 2021
24/12/2021  Our experts and analysts weigh in on what mattered for investors last year.
"A bump in the road" as Magellan loses major client
21/12/2021  New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship. 
What role should Bitcoin play in your portfolio?
10/12/2021  And how does it match up against gold?
Years of demand remain for Australian coal producers
10/12/2021  Australian miners to be among the last standing as coal use fades.
Year-end portfolio rebalancing: What you need to know
08/12/2021  Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation. 
3 quality names from Stewart Investors
03/12/2021  The gold-rated fund manager shares three ideas with long-term potential.
Silver linings for investors amid the climate stalemate: COP26 debrief
01/12/2021  Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.
6 qualities of great index funds
30/11/2021  To understand your fund, get to know its underlying index.
Lazard's 3 top picks for the energy transition
29/11/2021  These companies are set to profit from the move to clean energy, says Lazard.
An uneven energy transition leaves room for coal and gas: COP26 debrief
24/11/2021  The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.
What rising inflation means for Australian investors
17/11/2021  And how investors can protect their portfolios.
6 inflation-tough stocks for global investors
08/11/2021  Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.
Risk/reward equation still looks good at Westpac
05/11/2021  Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.
These aren't the Bitcoin ETFs you're looking for
19/10/2021  These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.
ESG funds don't underperform - but nor do they outperform
15/10/2021  The ESG outperformance narrative is flawed, new research shows.
Building investment portfolios in a low interest rate environment
06/10/2021  Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.
Covid impacts still being felt in real estate and tech: Reporting season roundup
01/10/2021  And how G8 Education and Link Administration are positioned for long-term success.
Look to Credit Corp for a leading indicator of economic health: Reporting season roundup
30/09/2021  What Reporting Season August 2021 told investors about the health of the financials sector.
Cause for optimism at a2 Milk and Invocare: Reporting season roundup
28/09/2021  a2 milk is an opportunity to be greedy when others are fearful.
Post-covid normalisation is underway in healthcare: Reporting season roundup
23/09/2021  Covid's winners and losers are returning to their prior trajectories. 
One of the most underappreciated dangers of investing
21/09/2021  Sequence-of-returns risk matters for both retirees and savers. Here's why. 
REITs recover pandemic losses: Reporting season roundup
20/09/2021  Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.
Australian banks face margin pressure amid low rates: Reporting season roundup
15/09/2021  Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.
Greenwashing explained
14/09/2021  Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.
Earnings down as private money circles infrastructure: Reporting season roundup
13/09/2021  Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle. 
Frenzy of mergers in energy: Reporting season roundup
10/09/2021  Hydrocarbons poised for a comeback.
TPG tipped to recover as mobile competition eases: Reporting season roundup
09/09/2021  Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.
Short-sellers bet against ARK Innovation ETF
08/09/2021  What shorting ETFs means for long-term investors.
Surging lumber prices were no match for Brambles: Reporting season roundup
07/09/2021  Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.
Miners soar thanks to iron ore: Reporting season roundup
03/09/2021  Miners bask in the glow of iron ore prices while bargains remain in coal.
BHP-Woodside merger is mutually beneficial
23/08/2021  Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.
Investors are getting serious about sustainability
16/08/2021  But the sector lacks uniformity, says Morningstar's Christopher Franz. 
Long term outlook for AGL is positive
11/08/2021  Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.
How you can hedge your portfolio against inflation
11/08/2021  Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.
The iron ore party can't last: Morningstar
10/08/2021  Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.
What the Afterpay acquisition means for investors: Morningstar Minute
05/08/2021  We believe the transaction has a high chance of succeeding.
Cannabis' federal legal status is not a total buzzkill
03/08/2021  The industry still has significant growth potential.
Stock of the week: Toyota
03/08/2021  Is one of the biggest sponsors of the Olympics positioned for an all-electric future?
2 listed microcap names to consider
23/07/2021  Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.
Big returns, big risks: Making money with microcaps
22/07/2021  Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.
3 small-caps with Dawn Kanelleas
21/07/2021  The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.
Forecast 2021–2022: A correction could be around the corner
20/07/2021  The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.
'Overvalued' warnings grow as ASX 200 hits new high
12/07/2021  Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.
What to know about private equity
08/07/2021  Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.
Lazard's 3 top picks for the global covid recovery
08/07/2021  Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.
Aussie banks $34bn surplus points to more shareholder dividends, buybacks
06/07/2021  Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.
Weighing up the PEXA IPO
02/07/2021  PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.
Can the iron ore price keep rising?
30/06/2021  Iron ore prices have  been on a tear, boosting the profits of Australia's top miners.  How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.
2 new stocks to watch
28/06/2021  Morningstar has recently initiated coverage of a food delivery app and a consumer finance product. 
'Strongest earnings season I've ever seen'
24/06/2021  Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.
Biotech beyond covid
22/06/2021  Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig
Alibaba is still deeply undervalued
21/06/2021  Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.
Weighing up the Endeavour IPO
18/06/2021  A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.
'Then we got hit with the equivalent of a war'
15/06/2021  Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.
Understanding Magellan's active ETF strategy
11/06/2021  Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.
3 off-the-radar small caps
10/06/2021  Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.
Small cap gems and how to find them
09/06/2021  Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.
Stock of the Week: Salesforce.com
08/06/2021  They’re building an empire.
3 oil stocks we still like
07/06/2021  A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.
Considering crypto? Here's what to think about
04/06/2021  As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio
Why we like Wizz Air
03/06/2021  The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.
3 global infrastructure picks
28/05/2021  4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.
Are crypto ETFs coming?
28/05/2021  The SEC continues to sort out its regulatory concerns.
Stock of the Week: Apple
27/05/2021  We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.
Opportunities in global infrastructure
25/05/2021  Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.
Tribeca's eye for Domain
24/05/2021  Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.
Stocks for emerging markets
19/05/2021  American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.
2 stocks for the rise of the robots
18/05/2021  Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.
Square: Stock of the week
18/05/2021  Square's Bitcoin purchase is more marketing than operations
Tesla: Stock of the week
10/05/2021  If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.
Why Tribeca's so upbeat on stocks
07/05/2021  Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.
Looking for value in emerging markets
05/05/2021  Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.
Cash slashed, Aussie equities up: Why Morningstar updates Model ETF portfolios
04/05/2021  Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.
Investing basics: Explaining the disconnect between the stock market and the economy
30/04/2021  The stock market and the economy are not the same. Here's why.