Brokers make minor adjustments to target prices for TPG Telecom following a strategy day that focused upon new targets and up-sell opportunities.  

-TPG confident on regulatory approval for Telstra agreement
-Agreement to lead to a 60% increase in addressable market
-Management expects elevated capex will persist
-Macquarie highlights a range of up-sell opportunities

By Mark Woodruff

Last week's TPG Telecom's ((TPG)) investor day shed further light on company strategy and longer-term opportunities.

With the market focusing on near-term headwinds, UBS believes investors should be focused on long-term upside from a more rational mobile competitive environment, reversal of covid headwinds and ongoing synergies from TPG's merger with Vodafone Australia.

The broker also sees benefits from execution of enterprise, government and wholesale opportunities, as well as potential upside from the company's Telstra ((TLS)) roaming agreement.

Management remains optimistic the Multi-Operator Core Network (MOCN) commercial agreement with Telstra will gain regulatory approval.

The Vodafone brand has been metro-centric up until now, points out Morgans. Assuming the deal is approved, it's expected to bolster regional spectrum, increase regional competition and increase TPG Telecom/Vodafone's addressable market by around 60%. It's also anticipated mobile churn will ease, as customers needing regional coverage often churn off Vodafone.

Credit Suisse notes good momentum in the Mobile business, with more than 120,000 net additions in the first half and a strong average revenue per user (ARPU) performance, driven by the return of roaming revenues and the benefits from price changes and up-sell.

On the other hand, Goldman Sachs suggests targets sets by the company are optimistic given ongoing competition/NBN impact and inter-capital fibre investment from competitors. One of the main targets is for $1bn in revenue by 2025 for Enterprise & Government.

Management also confirmed the FY22 capex range of $1.0-1.05bn, though also indicated elevated capex is likely to persist until the mid-2020's as the 5G build completes, which causes Neutral-rated Credit Suisse to lower its 12-month target price to $5.80 from $5.95.

UBS notes only 25% of the company's debt is fixed and increases its near-term interest cost assumptions as a result of higher bond yields and applies a higher near-term risk-free rate to it valuation. The broker's target falls to $6.90 from $7.10, while the Buy rating is retained.

Cross-selling opportunity

While it's early days, Macquarie suggests up-selling opportunities for TPG Telecom in consumer and enterprise are both encouraging.  

Only 20% of the retail consumer base is utilising a fixed and mobile product, according to management. The broker highlights the opportunity is even larger on the enterprise/corporate front, with only 4% of customers signed up to multiple products.

As part of new strategic aspirations set at the investor day, TPG sees a cross-sell opportunity for up to 4 million customers (current subscriber base 5 million) from the MOCN deal.

Macquarie has not factored the deal into its forecasts and cautions that should there be pushback from the ACCC, it could be dilutive to consensus estimates for forecast earnings and cash flow.

Capital expenditure

Analysis of capex for Vodafone Australia and TPG Telecom by Credit Suisse prior to the merger shows that Vodafone's average capex over the preceding decade was $682m.

When combined with TPG's business-as-usual capex average of $271m, the analyst arrives at a combined capex base of around $950m.

As a result of these calculations, a terminal year capex of $960m is forecast, up from $926m, which is largely responsible for the fall in the broker's target price to $5.80 from $5.95. The new target also recognises that while there will be some synergies from the merger and the network sharing deal with Telstra (assuming it goes ahead), these could well be offset by underlying inflation.

Outlook

Macquarie points out that while the company's shares currently offer a 2.8% dividend per share yield, this yield is expected to grow at around 16% per annum over the over the next three years.

It's felt fixed wireless and mobile subscriber returns, as well as potential enterprise market share gains will be key drivers of return on invested capital (ROIC) in the next few years and the broker retains its Outperform rating.

The FNArena database has six broker ratings with four Buy (or equivalent) ratings and two Hold ratings with an average target price of $7.02, which suggests 14.2% upside to the latest share price.

Goldman Sachs, not one of the seven brokers updated daily in the database, lifts its target price to $6.20 from $6.10 and retains its Neutral rating.

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