Interesting change to Goldman Sachs value on TPM . Comparative...

Interesting change to Goldman Sachs value on TPM .
Comparative valuations to other Telco's is one of the prime drivers of their new value.

TPG Telecom

(TPM.AX)

Core business under pressure; mobile execution risk increasing; TP -20% to A$4.70 and down to Sell

18 April 2018 | 8:36PM EST
Five reasons for our negative view: 1) Core business under pressure: TPM’s broadband business is facing both deteriorating margins and increasing competition. 2) Mobile execution risk: As TPM looks to become the fourth mobile operator in Australia and Singapore, we question whether it can make an adequate return on these investments and ascribe a negative base-case valuation in Australia. 3) Regulatory risk:While we see TPM improving fixed earnings through mobile substitution, we expect a response from the government to protect NBN competitiveness. 4) Balance sheet fully geared: Capital outlays and declining earnings should see Net Debt to EBITDA peak at 3.0X in FY20E, leaving limited scope for additional network investments or competitive headwinds. We see an equity raise to fund spectrum investments in Oct. as likely. 5) Valuation stretched: TPM’s valuation premium vs. domestic telco avg. has expanded to +33% (consensus 24mf EV/EBITDA) which in our view is unjustified given the execution risk and earnings outlook.
Downgrade to Sell; unfavourable risk/reward: We expect TPM to benefit from strong corporate growth and see upside potential if it delivers on its mobile investments. However, we view risk/reward as unfavourable with TPM trading at a significant and expanding premium to peers. We downgrade to Sell (from Neutral) and lower our SOTP-based 12-month Target Price to A$4.70 (was A$5.85), given lower broadband forecasts, prob. weighted mobile valuation (-A$350mn lower) and a reduced consumer multiple (5X, was 6X) due to the more challenging outlook. Our EPS estimates are now -5%/-8% vs. consensus for FY19/20E, largely driven by our more negative mobile outlook and further broadband share losses. Our revised Target Price implies an FY19E EV/EBITDA multiple of 8.0X (still a +30% premium to peers) and -13% potential downside vs. +14% average upside for our coverage universe.

PM Summary: Three challenging years ahead; downgrade to Sell

TPM is facing an extended period of capital expenditure, declining earnings, and execution risk as it looks to become the fourth mobile operator in both Australia and Singapore. Although a significant opportunity if successful, given the Australian mobile market has some of the lowest data prices and highest quality networks globally, we see limited scope for TPM to differentiate. We note this has only become more difficult over the past 12 months as pricing has trended lower, competitor network investments have increased, and TPM's existing mobile virtual network operator (MVNO) base has declined. Hence, we are concerned around the earnings outlook and gearing of the company over the next three years, and question whether TPM can make an adequate return on its investments, with a negative base case valuation for Australia Mobiles.
During this extended period of mobile investment, TPM's broadband business is facing both deteriorating margins and increased competition as the National Broadband Network (NBN) rollout progresses. The impact of this competition (particularly from smaller players) was evident in the recent 1H18 result, when its subscriber base declined for the first time in over a decade (Exhibit 1). With this competition likely to continue into 2H18 (i.e. Exetel and Kogan recently launched market leading plans), we expect TPM's subscriber base will remain under pressure. We view this as particularly concerning, given these subs help to fund its mobile investments and provide a significant cross sell opportunity. We do recognise an opportunity for TPM to use its mobile network to bypass the NBN and avoid the significant access costs, forecasting 23% fixed-to-mobile migration by FY25, resulting in incremental +A$65mn p.a. in earnings. However, we believe such a strategy would force a response from the government, resulting in either: (1) an impairment to NBN Co., which we view as an overall negative for TPM, despite the lower access pricing (Exhibit 2); or (2) the introduction of a levy on these subs, similar to its Fibre-to-the-Building (FTTB) network.