TPG Telecom

Gaurav Sodhi, Intelligent Investor

TPG’s recent interim result showed that shrinking broadband margins are being partially offset by the acquisition of iiNet, build-out of independent fibre and growth in the corporate business.

In aggregate, revenue grew 9% while EBITDA grew 28%. Some of this increase was due to expanding margins from bringing iiNet customers onto TPG infrastructure but cost-cutting was also significant. iiNet now generates an EBITDA margin of 26%; before being bought by TPG it made just 18%. By contrast, TPG’s consumer business generates an EBITDA margin of 38%.

The corporate business continues to perform strongly, increasing revenue by 4% and EBITDA by 7% and expanding the EBITDA margin from 40.6% to 41.8%. It enjoys high incremental margins because of the low marginal cost of signing customers onto existing fibre services. While the corporate business, which accounts for about a third of EBITDA, won’t be impacted by the NBN, in the consumer business ADSL margins of 40% will be replaced over time by NBN reseller margins that are much lower.

High reinvestment rates combined with uncertain rates of returns mean this recommendation relies to a degree on our faith in management. A splendid track record helps in that regard and, with an enterprise value to EBITDA multiple of less than nine, TPG is attractive enough to start building a position.