By Andrew Main
Connecting Australian households to the NBN is going to carry on eating shareholders’ money for a long time, as I recently realised after talking to some Telstra blokes in hi-vis shirts working in a street near my house in Sydney’s lower north shore.
Telstra shareholders? Well, not this time. These gentlemen told me they were putting in fibre for TPG Telecom, under contract.
I wasn’t going to ask them the terms and they weren’t going to tell me, even if they knew, but that episode jumped up at me this week as I have been looking at the recent lurch in share prices of the smaller telcos such as TPG and Vocus.
Specifically, TPG’s dropped from just under $12 to around $8 in the last month, and Vocus’ has dropped from more than $7 to around $5.60 over the same period.
What’s going on?
Both companies are clearly in a growth and consolidation phase, given that TPG swallowed iiNet for $1.6 billion, and Vocus took over Amcom last year. But where investors are clearly nervous is in trying to work out whether there’s a chance they are growing too fast for their own good.
Sometimes competition can be a bit like a yacht race: a luffing duel sees two competitors so busy watching each other that they part company with the pack and sometimes both lose out.
Given they are the next two players in the market after Telstra and Optus, and given Australia’s history of comfortable duopolies making life hard for numbers three and four, there’s a strong incentive for smaller companies to either get big, or get out.
TPG fell out of bed on October 5 because of some disappointment with its numbers for the June half. In very simple terms, revenue was up solidly, but earnings were not in comparison with the December half.
Net earnings for the half at $117.1 million were almost exactly in line with the previous June half, but well below the $202.5 million reported for the December half-year in between.
And the guidance for the 2016/2017 year, which is something that analysts love to climb all over, wasn’t as shiny as some had hoped.
What the brokers say
Tech companies are worse than conventional companies in how badly they get handled if the future isn’t rosy, even if, as a Citi analyst noted of TPG, management is just being conservative and the next report will provide an upgrade.
Citi has the stock as a buy, although they’ve dropped the 12-month price target from $14.50 to $13.35.
Just to give you the other side of the story, Credit Suisse rates it an ‘underperform’, with a price target of $8, down from $9 previously.
“FY16 results were in line with expectations but FY17 guidance disappointed Credit Suisse. The broker notes subscriber growth was again weak in the second half and the company's market share declined.
The broker attributes this to increased competitive intensity, particularly from Telstra.”
(That’s interesting … how do you think Telstra treats its client TPG when they are also competitors?)
"The broker updates its NBN transition analysis and calculates that TPG faces a $200m EBITDA headwind in the consumer business.”
All of which bears out my vox pop conclusion that there’s a lot of money that will still need to be spent providing fibre to actual, and potential, TPG clients in the many places that the NBN is yet to reach.
It’s instructive, by the way, to have a look at the discussion groups over TPG’s NBN offering. By and large they like it, particularly those tragics who need high speeds for gaming, but they won’t be paying up until the NBN gets within hailing distance of their premises.
Meanwhile, Vocus copped a Sell rating from CLSA on October 5 because of worries about the reliability of its accounts, citing the way the company has dealt with acquisition and integration costs, the amortisation of consumer intangibles, deferred customer acquisition costs and the impairment of receivables and accrued expenses. That’s quite a list.
Vocus chairman, David Spence, popped up quickly to say he stood by the financial statements that his board signed off on in late August, but inevitably, the spat has sown doubts in investors’ minds that may take some time to dispel.
Morgan Stanley Wealth Management last week decided that the sector was getting too exciting for its Emerging Companies model portfolio, tipping out its hypothetical 15% weighting in Vocus.
“Recent news flow and volatility has increased the risk profile for the stock in a concentrated portfolio,” clients were told.
These second-ranking telcos have no intention of going away, but they do have a few systemic disadvantages to overcome, and acquisitions to digest.