TPG share price jumps but value remains
Vocus Group’s bid for TPG’s fixed assets is indicative of the value within the telecom.
Mentioned: TPG Telecom Ltd (TPG)
TPG Telecom (ASX: TPG) is Australia's third-largest integrated telecom services company. It offers broadband, telephony, mobile and networking solutions catering to all market segments.
Shares jumped more than 12% on August 1st after TPG received an indicative offer for their fixed assets from privately held Vocus Group.
Morningstar Director of Equity Research, Brian Han describes the deal as a “potential value liberator”. TPG has been included on Morningstar’s Global Best Equity Ideas list since July 2021 and Han has long believed the market is overlooking the value of the company. Han touted TPG as the best opportunity in his coverage universe in a recent episode of Investing Compass.
Han cautions that investors should be prepared for the deal to fall through given the current economic and credit market volatility as debt financing still needs to be secured. But the bid should redirect investor attention to the hard assets within TPG which have been overlooked by investors.
Critically, if the deal is consummated, the current share price still values the rest of TPG’s business at just over 7.2 times forward earnings before taxes, interest, depreciation and amortisation (EBITDA). Han characterises this as too low given his projected earnings recovery for mobile and consumer fixed-line operations. He projects EBITDA to grow at a compounded annual growth rate of 9% for the next three years.
Han points out that there are significant tailwinds in the mobile space including price increases, reduced competition and the upside in margin from 5G.
Despite the increase in the share price, they are still trading 24% below our fair value estimate of $7.40. Han awards TPG a narrow economic moat rating.