Fast-growing telco TPG Telecom Ltd (ASX: TPM) this morning posted a net profit of $202.5 million on revenues of $1.15 billion for the six months ending 31 January 2016. The profit and revenue are up 90% and 84% over the prior corresponding period (pcp).
The result is distorted by the impact of the giant iiNet acquisition which contributed to a full five-and-a-half months of earnings. However, on an adjusted basis earning per share grew 31% to 19.6 cents per share, while underling net profit grew by 36% to $162.3 million. Impressive.
The iiNet acquisition in 2015 was part of a trend towards consolidation in the mid-cap telco sector that also saw rival Vocus Communications Limited (ASX: VOC) team up with Amcom and M2 Group as an alternative internet services provider.
Over the period TPG Telecom actually booked a $9.7 million profit on the disposal of its interest in Vocus Communications after it originally bought up nearly 20% of Vocus in an underhand attempt to block its merger with Amcom.
These kind of tactics are the hallmark of TPG's publicity shy founder David Teoh who continues to aggressively build the business by attempting to shirt-front or buy rivals in an ultimate quest to challenge the dominance of Telstra Corporation Ltd (ASX: TLS)
Telstra remains the dominant mobile provider, but TPG is teaming up with Vodafone to challenge this dominance and over the long term its more nimble nature and cost effective products may mean mobile becomes its next growth lever.
Internet and broadband services remain its core business for now with the consumer division netting 32,000 new subscribers as total EBITDA lifted $8.7 million to $125.6 million. The business also enjoyed the benefits of lower access costs as a result of the ACCC's fixed access determination for provided services.
The Corporate division's growth was even stronger with EBITDA up 12% to $131.9 million as subscribers increased and margins improved across a sector that enjoys strong tailwinds.
Debt
The group's aggressive expansion strategy means it carries net debt of $1.46 billion, which is significant but not excessive at 2.1x FY16's annualised underlying EBIDTA expected at between $770 million to $775 million.
The debt blowout should be watched though as it is effectively supporting the impressive headline numbers and will weigh down the net profit. All this means TPG's lofty share price valuation ($10.55) and big debt load places it high up the risk curve.
Outlook
The forecast for full year underlying EBITDA to be in the range of $770-$775 million suggests a second half of more double-digit growth and is a relatively narrow range that will give the market confidence in it at least meeting its forecast.
Over the long term TPG's founder is probably plotting to take on less nimble rival Tesltra, which has been lucky to have never faced much strong free market competition in Australia so far.
TPG's debt fuelled approach carries risks, although given the superb track record of management and digital tailwinds it remains one of the best growth stocks on the ASX in my opinion.
However, it remains in a highly-competitive space and if it cannot keep delivering on the historically strong growth rates investors should be aware the the valuation may take a tumble.
