The TPG Telecom Ltd (ASX: TPM) share price surged more than 4% on the ASX yesterday after the Aussie telco reported a 3.50% increase in underlying net profit after tax (NPAT) to $225.2 million for 1H19.
What were the highlights of TPG's results?
Underlying revenue fell 1.5% to $1.24 billion while earnings before interest, tax, depreciation and amortisation (EBITDA) before impairment climbed 2.8% to $424.4 million during the half.
The company's reported numbers plummeted lower after TPG's 26 February 2019 announcement that it would be scrapping its planned Australian mobile network build following the Australian Government's decision to ban Chinese giant Huawei's equipment from being used in 5G networks in Australia.
The company's gross margin fell slightly on prior corresponding period (pcp) across Broadband (45%), Fixed Voice (28%) and Mobile (19%) segments, while its Other segment remained steady at 58% for the half. Positively, overheads fell from $140.2 million (16%) to $127.6 million (15%) while EBITDA margin was steady at 29%.
Why am I not buying TPG?
TPG remains in merger talks with Vodafone via Hutchinson Telecommunications (Australia) Ltd (ASX: HTA) and is awaiting an ACCC decision on the transaction. There has been a lot of speculation that the recent decision to scrap TPG's planned 5G network was to ease ACCC concerns regarding competition in the telco space, rather than as a direct result of the Federal Government's Huawei ban.
Despite the change of direction, the TPG-Vodafone merger appears far from certain and there is a risk of a significant price drop if the merger is in fact rejected.
So, why is Telstra in the Buy zone?
Telstra (ASX: TLS) has had a well-documented decline in recent years as heightened competition from NBN Co Limited and declining profitability have seen its share price slide 45% from the start of 2015 to just $3.29 per share.
While ongoing headwinds exist for the company, the stock has rebounded 25.6% since the middle of last year and could stand to benefit irrespective of the TPG-Vodafone merger decision.
If the merger is approved, TPG would likely have less incentive to continue its aggressive pricing behaviour which could boost profitability margins for all of those in the industry, including Telstra. Additionally, Telstra remains the only known Australian network that does not have Huawei as an equipment provider for its 5G network, and TPG's withdrawal from the sector leaves Telstra well-placed to capitalise on the growth of 5G to compete with NBN Co for telco supremacy in the country.
For those who aren't sold on Telstra's rebound prospects just yet, I'd suggest checking out these top growth shares on the market which could boost portfolio growth in 2019 and beyond.
