TPG Telecom (TPM) shares plunged yesterday after the company revealed better profits for the 2015-16 financial year, but earnings guidance for the 2016-17 year that was below market expectations and a forecast of higher investment spending.
TPG reported a 70% increase in profits for the latest year, thanks to the acquisition of iiNet last August, and a higher dividend.
TPG – the second biggest fixed-line internet provider after Telstra (TLS) – reported net profits of $379.6 million for the year to July 31, driven by an 88% surge in revenue to $2.39 billion and one-off gains, which totalled some $93 million from selling shares the company held in other listed telcos.
The group declared a final dividend of 7.5 cents a share, up from 6 cents a year earlier, taking the full-year’s distribution to 14.5 cents, up 26% from 11.5 cents the previous year.
After reporting underlying earnings of $775 million, TPG management said it expects to earn up to $830 million in 2016-17. But shares the shares fell 21.5% to $9.28 the lowest price since January.
TPG forecast underlying earnings before interest, tax,depreciation and amortisation (EBITDA) of between $820 million and $820 million for the current year, well under the Bloomberg consensus forecast for EBITDA of $884 million.
TPG also said that capital expenditure will increase to between $370 million and $420 million, up from $281 million in 2015-16.
TPG said that capital expenditure guidance included $72 million for 1800 MHx spectrum, $50 million for international capacity purchases and a ramp-up in the rollout of its fibre network, which is targeting a total of 500,000 homes. A major problem for future earnings is the higher cost of accessing and servicing customers on the NBN.
“Our underlying EBITDA guidance for FY17 is affected by the acceleration of the NBN rollout which will create margin headwinds for the group and it also reflects the increasingly competitive market place and a level of uncertainty of outlook with regards to the CVC charges,” TPG said yesterday.
“During this period of transition to the NBN it’s the right strategy for the group to continue to compete aggressively and as a result the guidance has seen some reduction in margin but we see that as an investment in the long term good of the business.” According to New Street Research telco analyst Ian Martin this is going to be an ongoing problem.
"The margin they make on consumers is largely the result of a $15 copper access price and over the next three years most of that business will migrate to the NBN, where they pay a $43 access price," he said.
“A large part of the margin and the cash flow that drive TPG’s consumer business is going to move from TPG to NBN in coming years,” Martin told Fairfax Media.
TPG currently earns a 40% margin from its original customers, or 24% from iiNet subscribers. The iiNet business contributed nearly $250 million to TPG’s pre-tax earnings.
The $20 million drop in profits from mobile customers is due to TPG offering two months free service to make up for the inconvenience customers went through when TPG switched mobile wholesalers.
TPG has a $1.6 billion debt facility, with about $303 million unused.