TPG Telecom: Is the 4th Singapore Telco Provider Worth Your Capital?

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Foreword: There is a risk that is inherent with every decision we make in life- none more acute and more pronounced than investing with our hard-earned capital.

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The Dr Wealth Team

If you have been following the telco happenings so far, you would have known the recent entry of TPG Telecom – the fourth telco in Singapore.

TPG Telecom Ltd (ASX: TPM) (or “TPG” in short) launched its mobile service in Singapore this year with a SIM-only plan that includes unlimited data and unlimited mobile-to-mobile calls. To date, it has signed up nearly 200,000 users for its year-long trial.

Let’s check out more details about the company below.

Introduction

Founded in 1986 as Total Peripherals Group, TPG has the largest data network and voice network after Telstra, the largest fully converged voice, video and data IP-based access network in regional Australia and the largest voice-enabled IP network.

The firm provides mobile and fixed lines to its customers, as well as internet services. TPG boasts more than 700,000 NBN subscribers translating to about 1.9 million fixed broadband subscribers. TPG is set to become the 4th mobile network operator in Australia.

In December 2016, TPG announced that it is making inroads to the Singapore’s market, establishing itself as the 4th mobile operator in the country.

Sourced from https://research.sginvestors.io

And this has led to a big change in the Telecommunications landscape in Singapore. Here’s a quick background on the history of Singapore’s Telecom industry for those who are interested.

Back in the past, the unanimous strategy by the 3 Big Telcos – namely Singtel, Starhub and M1 – was to lock-in their subscriber base into 1 or 2 year contracts with limited data usage. The users who exceed their data usage must fork out extra money on top of the already expensive plans.

For myself, I can just recall that I am a mid-combo plan subscriber with Singtel and used to be paying north of $60 per month just for the mobile plan itself. After my jump to a SIM-only plan, I now only pay around $20+ monthly, saving an incredible $40 per month (that does not include the mobile handset discount).

These days, the 3 big telecom companies have all slashed prices to compete directly with new mobile virtual network operators (MVNOs) like Circles Life, MyRepublic, TPG and more. As such, their profit margins are being eroded in recent years.

With that in mind, investors may be wondering on how the 4th Telco TPG will be making headway amid this tough price war and whether their shares listed in Australia are worth a second look.

Below, we will evaluate the viability of TPG’s shares using our Dividend Growth strategy in today’s article.

  1. What is TPG’s Gross Profitability?
  2. Determine attractiveness of Dividend Yield
  3. Determine the sustainability of Dividends
  4. Conclusion: Is the Stock worth Buying?

The Dividend Growth Strategy is a quantitative approach to analyze stocks based on its numbers and proven to bring you market-beating returns. You can read more about the strategy at our Factor-Based Investing Guide.

Without further ado, let’s dive in!

1. What is TPG’s Gross profitability

Robert Novy-Marx, a Rochester University professor, discovered that the Gross Profitability ratio offers an accurate way of determining future investment returns. His empirical studies proved that stocks with high Gross Profitability can have equally impressive returns as with value stocks and documented his research in The Other Side of Value: The Gross Profitability Premium.

 Gross Profitability = Gross Profit/Total Assets

According to his research, companies that use lesser assets to produce higher Gross Profits are generally considered to be more productive and offer more quality than their competitors.

With that in mind, we did a quick comparison with the other 2 biggest Telecom companies in Singapore – TPG, Starhub, and Singtel to find out which one gives better return on assets (M1 Ltd has been bought out on April 2019 by Konnectivity – a joint-venture company between Keppel Corporation and Singapore Press Holdings):

Gross Profit (‘millions)

Financial Year 2018 TPG StarHub Singtel
Gross Profit 780.2 1,287.0 12,421.8
Total Assets 5,390.3 2,635.5 48,253.7
Gross Profitability (%) 14.5% 48.8% 25.7%

TPG figures are in AUD while Starhub and Singtel are in SGD.

From the analysis above, StarHub seems to be the best in utilizing its assets to generate profit among the 3 companies. On the other hand, TPG is coming in last even though it does not have so many assets as compared to Singtel.

Next up, we try to check out how attractive TPG’s dividend yield is.

2. How Attractive is TPG’s Dividend Yield?

Telcos are favoured by income investors due to their mouth-watering dividend yields. In this segment, we also examined the dividend yields as of 2nd August 2019. You can determine the historical dividend yield by taking:

Historical Dividend Yield = Dividend distributed in previous year / Current Share Price

FY2018 TPG StarHub Singtel
Dividend Yield 0.7% 7.7% 5.6%

To be honest, I was surprised with the meager dividend yield of 0.7% for TPG, much lower compared to Singtel and Starhub. In the back of my mind, I have always assumed that the Telecom industry is recession proof and the companies are usually the stable blue chips which dish out decent dividend yields.

Nevertheless, lets zoom into the next factor below for a more wholesome view of how TPG fares.

3. Can TPG Sustain Dividend Payouts to Shareholders?

The sustainability of a company’s dividend distribution can be measured using two indicators:

  • Average Free Cash Flow Yield
  • Payout Ratio

We can evaluate TPG’s Free Cash Flow Yield by deducting capital expenditure from Operating Cash Flow. Capital expenditures tend to be incurred on a rare basis; TPG may only need to invest in new assets on an occasional basis.

Thus, it is good that we analyze the capital expenditure pattern over three years to get a clearer picture.

Year (AUD million) FY2018 FY2017 FY2016
Operating Cash Flow 673.8 722.7 620.4
Capital Expenditure* 956.3 576.3 281.0
Free Cash Flow -282.5 146.4 339.4

*Capex includes acquisition of property, plant and equipment + spectrum assets + intangible assets

  • Average Free Cash Flow: AUD 67.7
  • Average Cash Flow Yield: Average Free Cash Flow/No of Shares ð 67.7/924.72 = 7.32%

The average cash flow yield of TPG across 3 years is 7.32%, which is higher than its Dividend Yield of 0.7%. Hence, the firm passed the Average Free Cash Flow criteria, the dividend distribution is therefore sustainable.

However, we should note that TPG is actually increasing its capital expenditure greatly in the past 3 years, more than tripling that of FY2016. Investors may want to observe the trend further as the company is now having a negative free cash flow in FY2018.

When it comes to Payout Ratio, we need to analyze the fraction of earnings being paid in form of dividends. Ideally, a good payout ratio needs to be contained below 1x.

Source: ShareInvestor.com

In TPG’s case, its dividend payout ratio is comfortably below 1x. In fact, it has come down from 0.43x in FY2014 to 0.09x in FY2018. and hence passes the Payout Ratio test. Low payouts are not inherently bad; they may mean more funds were retained by the firm to pursue more growth opportunities. One example is how they prepare to come to Singapore as a 4th Telco.

The Qualitative Side

For a wholesome analysis of TPG’s stock, we will delve further into the qualitative metrics and touch on 2 points below:

  • Moat (Competition)
  • Ownership

Moat

Sourced from WhistleOut

Australia’s telecom industry is pretty similar to Singapore – dominated by the three major mobile network operators Telstra, Optus, and Vodafone (VHA). TPG comes in as a 4th position and recently embarked on a merger with Vodafone. However, the latest news is that the merger has been blocked by Australia’s competition regulator because “Telstra, TPG and Optus (will be) having approximately 85% (market) share”.

In addition, although people have been getting excited with the entry of TPG in Singapore as the fourth telecom operator, the company has been experiencing some teething problems with a number of users reporting slower downloads and uploads speeds as compared to its close competitors.

According to the survey done by OpenSignal, Singtel, Starhub, and M1 have each recorded speed of 42.5 Mbps, 39.5 Mbps, 36.1 Mbps, respectively. On the other hand, TPG averaged at only 26.1 Mbps, almost 40% slower than Singtel’s speed. Moreover, TPG users were found to have spent 4.5% of the time without a mobile signal especially in the trains, far exceeding that of M1’s 1.6 per cent, StarHub’s 1.2 per cent and Singtel’s 1 per cent.

In short, TPG is not at the forefront of the Telecom industries and I would be inclined to say that TPG does not have a strong moat due the stiff competition in both Singapore and Australia.

Does Management Have Skin In The Game?

As a general rule, we prefer companies with the directors owning a large chunk of the company’s shares as it will likely lead to more aligned interests. If a vast portion of your wealth is tied up in the shares of the company, it is unlikely you will take detrimental action to destroy shareholder worth since it means destroying your own wealth as well.

But, there is a fine balance to things. Too little, and management won’t have skin in the game. They won’t feel threatened by the company’s downfall.

Too much and they can take the company private at unfair prices once they have bought back 90% of the shares. There have been cases where the owner-cum-management shortchanged the minority shareholders by offering a very low price to buy up the remaining shares and delist the company. You can read more about what we have to say about unfair delistings here.

In TPG’s case, the ownership disclosure by the FY2018 annual report looks like this:

Source: TPG
Source: TPG

From the gathered information above, David Teoh and his wife (Vicky Teoh) is the executive chairman of the TPG Telecom and owns a collective 34.3% of the company.

In addition, Washington H Soul Pattinson – an investment house with investments in a diverse portfolio of assets across a range of industries, owns a big 25.26% in TPG as well.

Adding the substantial ownership up give us 59.57%, a desirable level of ownership which investors would prefer.

4. Conclusion

TPG does not make the cut to be a good dividend growth stock because of its poor dividend yields and low gross profitability. While it has a decent free cash flow yield and payout ratio, its latest venture into Singapore may take up a lot of capital expenditure in the near term.

To make things worse, TPG is not in a dominant position in both Singapore and Australia and facing a price war would deplete its resources quickly. The regulatory call-off for the merger with Vodafone is also another dark cloud that the company needs to address before things can get better.

In a nutshell, we would stay away from investing our capital in TPG Telecom, for now… not until it shows that it has a foothold in the Singapore’s telecom market and ramp up the slow, intermittent speeds.

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