Updates on TPM & the National Broadband Network

Updates on TPM & the National Broadband Network

Yesterday we attended TPG Telecom Limited’s (ASX: TPM) FY14 full-year results presentation. I’ve compiled some short notes on their results below, as well as some more comprehensive thoughts on the expansion of their fiber-to-the-basement (FTTB) network.

Headlines:

i)               Revenue growth of 34% from $724.5m to $970.9m

ii)              Reported EBITDA growth of 33 per cent from $272.6m to $362.4m

iii)            NPAT growth of 15 per cent from $149.2m to $171.7m

iv)             77,000 additional broadband customers (comparatively iiNet added 40K; Dodo added 70K) plus acquisition of AAPT for $450m

Overall, the business appears to be growing well, however, there are additional considerations to take into account in terms of their future success. Firstly, let’s note that TPM appears to have a competitive advantage in the market in that it can offer its services (such as broadband) for a lower cost than competitors, whilst still earning a healthy economic profit. This has been the case for both its operations on the ADSL network, as well as the much anticipated National Broadband Network.

As noted above, TPM acquired AAPT in late 2013 for $450 million. This acquisition is important, as it allowed TPM to take control of a large network of interstate cabling (11,000 kilometers worth, as reported by the AFR). This cabling gives TPM the capacity to deliver broadband plans with unlimited data quantities without incurring excessive costs (which is a drawback for firms such as iiNet).

In 2013, TPM announced its plans to rollout its (FTTB) network in direct competition with NBN Co. The ACCC began to review legislation created when the NBN was first being established (said legislation had the intent of stopping telcos competing with NBN Co) and found TPM to be within the limits of the legislation, as long as they kept their FTTB builds within a radius of one kilometer of the current network.

Subsequent to this decision, Communications Minister Malcolm Turnbull proposed a new measure to ensure that private telcos who do build FTTB networks would allow competitors to use the networks at a fair price (whether this measure will be effective or not is another question).

Overall, this is quite a complicated scenario for several reasons. Not only can TPM earn revenue through the retail of its own FTTB service, it can also charge other telcos to use its infrastructure. It’s noted that once FTTB assets are set up at a particular premises, there are technical (and likely contractual issues) if a competitor attempts build their own assets there as well. Given this, as well as the new measures proposed by the Minister, how much can TPM charge competitors to use its assets? This will most likely be a matter for the ACCC (if the rates the ACCC have allowed Telstra to charge for their copper network are anything to go by, it may be quite lucrative).

The FTTB network for TPM could be a great opportunity, but it would be unwise to assume that it will go off without a hitch. NBN Co was well-funded; however came across a large number of hurdles as they rolled out fiber-to-the-premises (FTTP) networks. FTTB is notably less labour-intensive than FTTP, but there are still hurdles. For example, if we were to consider an apartment block, in order to build FTTB assets TPM would need to the consent of the landlord/strata whom may not agree to TPM’s terms.

Notably, both Telstra and Optus have indicated that they would also be interested in developing their own NBN networks, meaning you’ll have many telcos pursuing the millions of customers that NBN Co has not yet reached. NBN Co has warned several times that without access to these more profitable customers in metro areas, they will have difficulty remaining commercial whilst servicing more expensive rural areas.

How viable the NBN Co will be as a loss-making institution is a big question; perhaps one that’s best considered against the attitudes of whichever party is in government at that time. On the other hand, the significant opportunity created for those in the private sector is worthy of attention from investors.