TPG to Build Mobile Network

TPG to Build Mobile Network

Although TPG Telecom (TPM) has been the topic of several past blogs, further developments have occurred that are worth writing about. TPM is currently primarily an internet service provider, however, they do also have mobile phone plans. These plans rely on another company’s network (Vodafone) as TPM does not have its own mobile service infrastructure. This is about to change with TPM recently successfully bidding for a chunk of mobile phone spectrum. This is a precursor to building its own mobile network.

Click here to read my previous article on TPG Telecom.

Due to the limited space available in the part of the radio spectrum suitable for mobile phone signals, the government conducts an auction system that awards portions of the spectrum to the highest bidder. In the recent auction, the government (specifically the Australian Communications and Media Authority) set a reserve price of $857m but TPM only won the auction by paying well over this amount at $1.26bn. Many market commentators mentioned that this was a very high price to pay for the spectrum but TPM CEO, David Teoh, simply claims it is the cost of future profits.

Regardless of whether or not TPM overpaid, the effect of the announcement on TPM’s competitors was clear from their share price reactions. Telstra’s (TLS) share price dropped by 7.2% immediately following the announcement as shareholders worried that TPM’s entry would crimp TLS margins in the mobile sector. TPM is known for pricing its services quite aggressively and it is expected that it will offer cheaper mobile plans than TLS. Furthermore, with its large base of internet subscribers, TPM will be able to offer bundled plans that further improve the value for money for the consumer.

Interestingly, the market reaction to TPM’s announcement that it had purchased the mobile spectrum was decidedly negative. The share price dropped 14% after emerging from the trading halt although it has recovered some of that loss. This decline brings TPM’s total decline to over 50% from its highs of 2016. In fact, the stock is now trading back at levels not seen since 2014. This raises the question then of whether the stock is now cheap considering the large price decline. Based on the most recent half yearly report, the annualised trailing P/E ratio is currently at around 11 times. Considering that TPM has a lot of growth opportunity, this suggests the fall in share price is overdone. Having said that, there is a fairly high degree of risk in TPM’s mobile expansion plans and it will take many years to determine whether the strategy has been a success.

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