This time last year TPG Telecom’s surging market capitalisation was higher than that of Qantas, News Corp and Crown Resorts.
But since the company warned investors in September that margins in its consumer broadband business would be severely squeezed by the National Broadband Network, its share price has declined over 60 per cent.
It took another blow this month, as it outlined an audacious plan to counter this.
Having paid $1.2 billion at a government auction for mobile spectrum, above the market’s expectations, TPG announced it would invest a further $600 million over three years to become Australia’s fourth mobile network, reaching 80 per cent of Australians.
The strategy comes hot on the heels of a spectrum purchase in Singapore, where the company also plans to break up the local mobile oligopoly.
TPG has never operated a mobile network before, and has never expanded outside Australia. While investors uniformly praise TPG founder, CEO and significant shareholder David Teoh, who grew the company from a small computer hardware store in Sydney to an ASX heavyweight, there’s no denying he has a lot on his plate.
As Watermark Funds Management investment analyst Delian Entchev puts it: “If you’re looking at TPG today as an investment, you’re not investing in the company, so much as investing in David Teoh’s ability to pull this off.”
Share price hit
Some of its share price decline this month since can be attributed to a dilutive capital raising. But market scepticism also played a part.
The amount of TPG shares sold short (where investors are betting on a fall in the share price) rose sharply after the mobile announcement to over 23 per cent of the free float. This makes TPG the third most short-sold ASX200 stock, according to Bloomberg.
The share price reaction suggests many expect TPG “to do worse than fail” in the mobile market, said Ophir Asset Management’s Andrew Mitchell.
As for the analysts, they are unusually divided on TPG.
In the bull camp are Morgan Stanley, Goldman Sachs and Petra Capital, who have price targets of $10.00, $9.43 and $9.58 for TPG respectively.
At the other end of the scale are Credit Suisse, JP Morgan, and Shaw and Partners, who have price targets of target prices of $5.25, $5.55 and $4.63. The stock closed at $5.93 on Friday.
Mr Teoh told investors to trust the company’s track record. In rare media interviews this month, he said TPG could enter the mobile market “more efficiently” than others.
It’s something not fully appreciated in the market, said Robert Millner, who represents major TPG shareholder Washington H Soul Pattinson on TPG’s board.
WHSP, Mr Teoh, and Mr Millner, who personally owns $35 million in TPG shares, all took up their full entitlements in the recent capital raising.
“People don’t quite realise the cost advantage we have is unbelievable,” Mr Millner told The Australian Financial Review, as TPG will not have to pay to maintain an expensive, legacy network.
He acknowledges it will take some years for the company to start seeing the benefits of its upcoming investments. But he said the normal business – particularly the corporate telecommunications arm – is still growing and providing solid cash flows.
Questioned on TPG’s dramatic share price fall over the past year, Mr Millner points out that several of the market’s most high-growth stocks, such as Blackmores and Domino’s, which had been trading on massive multiples, have recently been sold down. “These high-growth stocks have come back to reality,” he said.
As for the most recent declines, “sure, the spectrum price was more than people had expected us to pay. But you don’t bid against yourself in these auctions – one of the other operators clearly thought it was a fair price as well.”
Watermark Funds Management’s Mr Entchev doubts TPG can make a solid go of mobile while investing only a further $600 million – around half of what competitors Optus and Telstra spend on maintenance alone each year.
He can understand the logic of TPG’s push into mobile, as it allows the company to take advantage of an industry trend that sees customers buy package deals offering internet, mobile and content plans from the same provider.
But Mr Entchev fears the TPG founder has been forced by the NBN into operating in an area where TPG does not have much expertise. And he worries about TPG’s ability to deliver on still-high growth expectations.
“A lot of TPG’s growth in recent years has been from acquisitions, and integrating acquisitions. Now the market’s become more saturated, and organic growth will be more challenging.”
Ophir’s Andrew Mitchell said the market “seems to have forgotten the strategic value of the spectrum itself, if it was ever sold on to a competing telco”.
“David Teoh has a proven ability in successfully allocating capital to extract the best possible returns,” he said. “[Mr] Teoh is putting a substantial amount of his personal wealth into the purchase of the spectrum and in our view he’ll demonstrate again his skill in generating excellent return on capital.”
TPG, Vodafone merger potential
There’s always the speculated possibility of a Vodafone/TPG merger to consider. The synergies between the two telcos, Mr Mitchell said, “would be immense”.
Mr Entchev however argued that given neither company has given any public indications of such a merger, it would be foolish to buy in now on this consideration.
Colonial First State Global Asset Management has bought the recent dips to increase its TPG holdings. Its head of research for Australian equities, Christian Guerra, pointed out that TPG’s already owns 20,000 kilometres worth of optical fibre criss-crossing Australia. It takes spectrum and base stations to run a mobile network, but it also takes a fibre network. TPG already has one.
The industry is ripe for disruption, Mr Guerra added. The last time Australia had four mobile networks, before the merger of Vodafone and 3 in 2010, there was $4.5 billion worth of earnings before tax, interest, depreciation and amortisation in the sector. In the 2015-16 financial year, the three operators were making $7.4 billion of EBITDA, of which Telstra takes the lion’s share.
“Partly, that huge expansion of the revenue pool is because we’re using more mobile services – more data and the like,” he said. “But mobile operators, as we’ve moved from four to three players, have raised prices to consumers and reduced their handset subsidies. It’s a great opportunity for a fourth operator to come in.”
Does the growing complexity of TPG concern him?
“When I think about the management and how much they’ve achieved so far, I think they’ve got a great track record.
“There absolutely is complexity … but I’m as comfortable as I can be.”