TPG Telecom (TPM)
THE small end of the telecommunications market has been active with acquisitions to manoeuvre into the cloud-computing services domain. This is a deliberate strategy to diversify away from just providing basic broadband and voice services, towards more sophisticated services for businesses. The time is coming when these small players might look towards each other.
TPG Telecom earlier this year made its own small foray into cloud-computing services with the acquisition of IntraPower for $12.8 million. Executive chairman David Teoh says the acquisition is a key step in the company's plans to widen its range of solutions to business, corporate and government customers.
According to industry research consultants IDC, the growth in network applications and services will grow very quickly over the next few years. Managed Data Networks will grow at an average 10 per cent a year through to 2014, while unified communications services (video conferencing, video telephony etc) will grow at 7 per cent each year. Cloud-computing services should grow at about 20 per cent a year.
TPG will need to be on its game as Telstra is also a very serious competitor in this area. Telstra last year generated more than $1.1 billion in revenue from these types of services, based around its Next IP and Next G networks.
Telstra has also committed to spending more than $800 million in cloud computing over the next five years.
TPG clearly cannot compete head on with that sort of firepower. But as with the retail broadband market, there are many opportunities within small to medium enterprises and even the public sector for TPG to realistically capture market share.
Building this business will take time. It must also be approached differently to hauling in retail broadband subscribers where a heavy emphasis is placed on advertising, marketing and promotion. Developing network services will require competitive tendering for contracts that will logically require time and effort to procure. The revenue and earnings stream, however, will have more of an annuity style to it.
The company recently repeated operating earnings guidance for the year to July 2012 of between $250 million and $260 million. The stock's current market valuation relative to this level is in line with its peers, which doesn't necessarily indicate good value. Weighed against the under-valuation of the broader market however, and considering growth potential, investors should consider buying the stock below $1.50.