This morning internet services and mobile provider TPG Telecom Ltd (ASX: TPM) reported an adjusted net profit of $217.7 million on revenue of $1.25 billion for the six month period ending 31 January 2018. The adjusted profit was up 5% on the prior corresponding period (pcp) with EBITDA (0perating income) of $418 million flat on the pcp's adjusted result.
This is a solid result in the circumstances given the company's consumer broadband margins are being eroded by the arrival of the NBN as consumers transition from ADSL to NBN services. The transition took $21 million out of TPG's EBITDA just over the most recent half.
The group's subscriber growth was reasonable, while it also has its own high-margin fibre-to-the-basement (FTTB) home broadband network it has heavily invested in constructing over recent years that grew 8,000 subscribers over the period and offers further profit growth potential.
Its voice business also continues to shrink which is an industry trend, while its business as an operator of virtual or piggy-backed mobile networks also shrunk 5.4% to 421,000 subscribers. Management suggested piggy-backed mobile was a competitive space and not worth investing heavily in given TPG is committing around $1.9 billion in total to build its own mobile network.
This commitment places TPG higher up the risk scale given its ballooning debt profile, but given Telstra Corporation Ltd (ASX: TLS) alone provides 17.4 million mobile services TPG will soon compete for market share in a lucrative sector on a reasonably equal footing with Telstra.
TPG expects to reach EBITDA breakeven with just 500,000 mobile subscribers or a market share of 2%. I expect its innovative management team will deliver a more competitive offering than Telstra, Vodafone, Optus, and others, although the network quality will remain crucial to its overall success.
TPG is also investing in building its Singapore mobile business that is expected to be operational by the end of 2018.
Corporate business
TPG's dark fibre and data centre business is probably its most attractive segment with half-year EBITDA of $158.9 million on revenue of $375 million producing an EBITDA profit margin of 42.3%, which is very juicy given the growth outlook is supported by the ever-increasing demand for data and high-speed internet services.
Management also flagged it expects to clock a substantial uplift in revenues and profits once dark fibre services under its deal with Vodafone Australia go live from the beginning of May.
Debt
As at the end of January the group had bank debt of $1.394 billion at a significant leverage ratio of 1.7x EBITDA. It has undrawn headroom on its debt facilities of $900 million which suggests it will not have to raise capital to meet its mobile investment commitments.
The telco will pay a final dividend of 2 cents per share, with a reinvestment plan available at a 1.5% discount.
The company upgraded its full year underlying EBITDA guidance marginally to between $825 million to $830 million, which looks conservative given first half EBITDA came in at $418.2 million.
Foolish takeaway
TPG looks a well run business and I continue to rate the stock a buy given the valuation on less than 13x earnings per share reflects the market's expectation that the NBN will hurt profits.
Generally it seems institutional investors are keeping TPG in the NBN-doghouse alongside Telstra and Vocus Group Ltd (ASX: VOC). The latter two I would rate as sells given their differing problems including the NBN, excess debt, and mismanagement, while TPG may offer value thanks to its superior management.
TPG is not perfect, but looks good value to me compared to 99% of stocks on the local market and if it's able to deliver on its mobile plans I expect it will deliver substantial returns to shareholders out to 2020 and beyond.
