Although TPG Telecom Ltd (ASX: TPM) cut its final dividend to 2 cents per share and forecast a decline in earnings for FY2018, this was overshadowed by TPG announcing that it has exceeded FY2017 guidance with underlying revenue growing by 4% and underlying EBITDA growing by 8%.
Moreover, shareholders responded positively to news that TPG was able to increase its debt facilities by a further $750 million. This allows TPG to fund its capital expenditure on its mobile network and spectrum through debt rather than equity resulting in a positive outcome for shareholders as their shareholding is unlikely to be diluted by a capital raising.
However, a major headwind facing the telecommunications industry in Australia is the rollout of NBN which will compress margins for all players. This is reflected in TPG's forecast that FY2018 EBITDA will fall to between $800-$815 million as a result of approximately 400,000 – 500,000 fixed line subscribers shifting to the NBN.
TPG will have to pay a higher connection fee for access to the NBN in comparison to the connection fee it paid to lease copper wires, which results in an increase in wholesale costs and a lower EBITDA margin.
The EBITDA margin is expected to fall even more dramatically over the next few years as more customers migrate to the NBN. However, as households are forced to migrate to the NBN over the next few years, this will increase the customer churn rate for other ISPs which provides an opportunity for TPG to gain market share by providing a lower priced option.
Moreover, TPG is exploring other opportunities to offset the margin declines in its broadband business. These include constructing a 4,000-km fibre network for Vodafone and rolling out mobile networks in Singapore and Australia. This has increased capital expenditure as shown by FY2017 capital expenditure of $576.3 million, with 36% of this capital expenditure being on mobile spectrum purchases in Singapore and Australia.
Capital expenditure is expected to remain at elevated levels for the next few years as TPG continues to invest heavily in its mobile networks.
In April 2017, TPG announced its plans to build its own 4G mobile network in Australia by acquiring two 10MHz lots in the 700MHz band.
TPG plans to invest $600 million over the next three years into its mobile network with a goal of building a mobile network that covers over 80% of the Australian population. It's expected that the mobile network will be complementary to TPG's core broadband business as it allows TPG to effectively bundle together broadband and mobile services. Moreover, TPG is expected to make a significant return on its mobile network by leveraging its broadband subscriber base which currently stands at over 2 million subscribers.
Foolish takeaway
Shareholders should view the final dividend cut positively as TPG is retaining more money within the business to invest into its mobile network in Australia and Singapore. This mobile network is expected to lay a solid foundation for growth and offset the margin declines in its broadband business.
