TPG Telecom: Result 2019

If sense prevails, this should be the last time TPG Telecom reports as a standalone business. The proposed merger with Vodafone Hutchison Australia (VHA) was knocked back by the ACCC earlier this year and the appeal will be heard by a judge by October. It could be early in the new year before a decision is made.

In our view, the merger is in the best interests of both the companies involved and of consumers. 

Telstra dominates the mobile sector with over 50% market share, a huge slice of industry profits and margins that, while lower now than at their peak, are still higher than most. 

Vodafone may not survive independently and, with the NBN tearing through broadband margins, TPG would struggle in the merger's absence.

With the deal so pivotal and a verdict now closer, few paid attention to TPG's full year results. For the curious, it was a good result in the circumstances. 

As expected, broadband margins are falling in line with the NBN's growth. Corporate profits continued to grow, albeit slower than historically, but there are growing questions about the NBN's strategy in the corporate market. Will it be a stronger competitor in the future? 

Fibre, once laid, is a local monopoly. It makes little sense to duplicate and it scales beautifully for the incumbent. TPG's head start with corporate fibre should offer some protection but there is no doubt the NBN poses a threat.

In TPG: how good can it get, we outlined a valuation for the merged business that comes to about $8 a share. We also noted that the combined group will have growth options and scale benefits not available independently, and profits will likely be higher than many expect.  That's if the deal gets done. 

Without it, TPG is deeply wounded and Vodafone fatally so. We think TPG would be worth, at most, about $4 a share without the merger. With the range of outcomes wide and little available insight into how this will end, acting now may not be the best course of action. HOLD.