Key Morningstar metrics for TPG Telecom TPG

  • Fair Value Estimate: $6.40
  • Morningstar Rating: ★★★★★
  • Morningstar Economic Moat Rating: None
  • Morningstar Uncertainty Rating: Medium

TPG Telecom's 2024 underlying EBITDA increased 3% to $1.988 billion and net profit grew by 5% to $87 million. The income picture masks a three-fold-plus jump in underlying free cash flow to $672 million, and 2025 EBITDA guidance is eminently achievable.

Why it matters: The full-year result implies second-half EBITDA increase of 5%, from 2% in the first half, and operating momentum is carrying into 2025. Benefits of recent mobile price rises are flowing, while the new Optus regional network sharing arrangement is a tailwind to subscriber gains.

  • The free cash flow jump to $672 million, after two years of anemia, looks largely maintainable. Our forecast average 5% earnings growth over the next three years coincides with declining capital expenditure, from AUD 1 billion in 2024 to $700 million, or $600 million if the fiber asset sale completes.
  • Our earnings forecasts hinge on management delivering on the simplification and efficiency program. Signs are positive to-date, with second-half operating costs up 1% (from a 7% lift in the first), albeit $55 million to $65 million of first-half regional ramp-up costs need to be absorbed.

The bottom line: We retain our AUD 6.40 fair value estimate. Our EBITDA projections are largely intact, with our AUD 1.988 billion 2025 estimate already at midpoint of $1.950 billion to $2.025 billion guidance. We are unperturbed by the likely regional ramp-up cost-induced second-half skew.

  • Shares in no-moat-rated TPG remain at a steep discount to our intrinsic assessment. The earnings recovery story is intact, a new era of prodigious free cash flow is dawning, and the Optus regional partnership increases the addressable market for the mobile unit.
  • Balance sheet concerns should no longer exist, with bank net debt/EBITDA of 2.3 versus the covenant of 3.75. This is prior to receipt of $4.7 billion, if the sale of fibre assets to Vocus gets regulatory blessing sometime in the next few months.

TPG bulls say

  • Cross-selling opportunities remain for both consumer and corporate markets.
  • The regional mobile network-sharing deal with Optus increases the scale of TPG and allow it to better compete against Telstra and Optus in the overall Australian market.

TPG bears say

  • TPG Telecom's service levels are seen as less attractive than some peers. Market share gains have been driven by pricing.
  • Development of the national broadband network could lower barriers to entry, providing open access for new players to enter the market and deliver fiber broadband services. This scenario is increasing competition.

Key Morningstar metrics for IDP Education IEL

  • Fair Value Estimate: $22
  • Morningstar Rating: ★★★★★
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: High

We decrease our fair value estimate for narrow-moat IDP Education by 4% to $22 per share following interim fiscal 2025 results. The decrease reflects lowering our student placement volume forecasts due to additional regulatory challenges during the half, partially offset by very strong average fee increases and the time value of money. Shares remain materially undervalued as the market appears overly concerned with IDP’s student placement business. The international education industry and immigration, more broadly, will remain important economic growth drivers. We expect IDP to eventually benefit from a rebound in volumes.

IDP reaffirmed its guidance for industry student volumes to decline by 20% to 30% in fiscal 2025 in key target markets of Australia, Canada, and the UK. We expect it to continue taking market share and forecast student placement volumes to decline 19% in fiscal 2025. In 2024, IDP reported an aggregate volume decline of 15%, compared with a 28% decline for the industry. This outperformance narrowed more than we expected in the first half of fiscal 2025, with IDP recording a 27% volume decline versus a market decline of 28%. However, this was largely driven by abnormal underperformance in Australia due to visa processing delays affecting the timing of enrolments. IDP recorded a 25% volume decline against a 1% decline for the broader industry.

We think IDP’s outperformance over 2024 is reflective of high-quality operations and superior student visa approval rates. We expect student placement volumes to remain depressed before rebounding 12% in fiscal 2026, given election cycles in Australia and Canada will complete and provide more stability in regulatory policies. International student caps are also temporary and in response to transitory cyclical concerns.

IDP bulls say

  • IDP benefits from tailwinds including increasing international mobility and a growing middle class in the developing world.
  • Through its part-ownership of IELTS, IDP owns a stake in one of the world’s most widely accepted English language tests.
  • IDP operates one of the world’s largest student placement services with diversification across source and destination countries.

IDP bears say

  • IDP’s business is challenged by increasing isolationism and decreasing globalization.
  • The IELTS language test has been losing exclusive English proficiency certification licensing rights over the past decade and faces increasing competition.
  • IDP’s student placement business is challenged following Australia losing popularity as a destination country for prospective students due to repeated border closures.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.