Financial Advisory Report On TPG Telecom Ltd

Background

The report will be providing the services relating to financial advisory. For the current report TPG Telecom Ltd been selected. The report will be investing as well as analysing the current financial situations of the TPG Telecom Ltd as the means of providing advice to the clients. The report will be placing focus on the financial statements of TPG Telecom Ltd to better understand the structure of corporate governance and the ownership structure of the TPG Telecom Ltd. Additionally ratios based on profitability, financial leverage, market value and efficiency will be computed to understand the viability of making investment in TPG Telecom Ltd.

A graphical representation of the shares prices will be carried out and the same will be compared against the all ordinary index to understand the movement in the share prices over the years. Emphasis would be paid towards the debt structure of the TPG Telecom Ltd along with the dividend policies of the company. finally the report would be providing a letter of recommendations containing appropriate recommendations regarding the investment prospect in TPG Telecom Ltd.

TPG Telecom Ltd is regarded as the Australian telecommunication and company that specializes in information technology services. The company also provides its customer with services related to mobile phone as well as internet services. TPG Telecom Ltd is regarded as the second largest internet service provider with largest provider of virtual mobile network operator in Australia (Tpg.com.au 2018).  TPG Telecom Ltd has more 671,000 subscribers of ADLS2+ along with 358,000 subscribers in land line. It also has mobile subscribers that stands more than 360,000 customers and is the second largest owner of ADSL2+ network in Australia.

Considering the history of the company TPG Telecom Ltd was formed through merger between the total peripherals group that was established by David and Vicky Teoh back in 1986 and SP Telemedia in 2008. The total peripherals groups was established during the year 1986 by the Malaysian born Australian businessman named David Teoh in the form of IT company that sold OEM computers and then moved towards mobile and internet services (Tpg.com.au 2018). The company undertook almost 70 per cent of the controlling interest of Adelaide internet provider and later rapidly took over SP Telemedia to bring TPG underneath single banner.

TPG Telecom Ltd generally markets five types of product and services that includes the internet service, services related to OEM, networking, services related to mobile phone and accounting software services.

Shareholding Structure

Substantial Shareholders:

There are number of shares that are held by the substantial shareholders along with their associates (Tpg.com.au 2018). The below listed is the name of the substantial shareholders of the TPG Telecom Ltd are as follows;

Name of the Shareholders	Total number of Ordinary shares held	Total percentage of the capital held
David Teoh and Vicky Teoh	317,933,350	34.38%
Washington H Soul Pattinson and Company Limited	232,575,734	25.15%
TSH Holdings PTY Ltd	78,048,498	8.44%
Victoria Holdings Pty Ltd	77,170,861	8.35%
HSBC Custody Nominees (Australia Ltd)	66,398,784	7.18
David Teoh	47,476,499	5.13%
Vicky Teoh	47,100,369	5.09

The tabular representation provides that there are two substantial shareholders that holds greater than 20% of the shareholdings for TPG Telecom Ltd. This included a combined shareholdings of David and Vicky Toeh of 34.38% while the Washington H Soul Pattinson and Company Limited held 25.15% of the total share capital (Tpg.com.au 2018). On the other hand there were five shareholders that held 5% or more of the share capital for TPG Telecom Ltd with TSH Holding and Victoria Holdings Pty Ltd each held 8.44% and 8.35% of shares respectively. On the basis of classification of the shareholdings, TPG Telecom Ltd can be considered as the family company this is because a combined 34.38% of the shares are held by David and Vicky Teoh.

People involved in the governance of TPG Telecom Ltd Board: 

The board structure of the TPG Telecom Ltd comprises of the board of directors in the form Chief executive officers and the executive chairman (Tpg.com.au 2018). TPG Telecom Ltd has four non-executive directors and a company secretary.

Name	Position Held	Total Number of Shares
David Teoh	Executive Chairman and Chief Executive Officer	47,476,499
Denis Ledbury	Non-Executive Director (Independent)	Nil
Robert Milner	Non-Executive Director	Nil
Joseph Pang	Non-Executive Director (Independent)	Nil
Shane Teoh	Non-Executive Director
Mr Stephan Banfield	Company Secretary

The tabular representation provides the governance structure of TPG Telecom Ltd. While the above listed people that are involved in the corporate governance of the company involves David Teoh that holds 5% of the share capital (Tpg.com.au 2018). While the rest of the directors does not have shareholdings and there are no such people in the firm governance that holds more than 20% of the share capital. An argument can be bought forward by stating that TPG Telecom Ltd cannot be classified as the company that has family members involved in the corporate governance of the firm.

Liquid Ratios: 

 

Financial Leverage Ratios

 

Efficiency Ratios

 

Profitability Ratios:

 

Market Value Ratios 

 

 

Figure 1: Graphical Presentation of TPG Telecom Ltd Share Price Movement

(Source: Created By Author)

The monthly graphical movement in the share price of TPG Telecom Ltd has been plotted against the All orders index to understand the movement in the price of shares (Au.finance.yahoo.com 2018). The graph evidently lay down that the share price of the TPG Telecom Ltd has been on the declining trend. Very few instances have been obtained where the share prices of TPG Telecom Ltd went above the all ordinary index.

The graphical representation of the share price of TPG Telecom Ltd shows that in the month of March 2016 the share price to stand at 6.96% against the all ordinary index of 3.19% (Au.finance.yahoo.com 2018). However in the following month of April the share price represented a sharp declined as the share price stood negatively at -4.64% against the all ordinary index of 2.48% (Finance.yahoo.com 2018). In the preceding month of May the share price took a sharp turn and increased positively to stand at14.95%.

Corporate Governance

 

Figure 2: Graphical Presentation of Stock Price Movement

(Source: As Created by Author)

The graphical movement in the stock price of TPG Telecom Ltd states that share prices are highly volatile with disappointing margin of headwinds being faced by the company. This headwinds has immensely contributed to the declining share price over last one year (Crowther 2016). TPG Telecom Ltd recorded a highest fluctuations in the share price during the month of March 2017 where the share price stood as high as 11.66% while in the subsequent month of April it declined to stand negatively at -13.22%. The movement along the graph represents that the share value of the TPG Telecom Ltd is undervalued in respect of the future cash flows and its share price is relative to its stock market (Haffar and Searcy 2018). However with the recent upward rising trend in the share price of the TPG Telecom Ltd it can be stated that the present share price of the company is over the future cash flow value.

TPG Telecom Ltd which is one of the telecom company having based in Australia witnessed a decent growth at the teen level in the ASX over the last few months (Eccles and Serafeim 2014). In spite of gaining the company witnessed a decline in its share prices over the last year. An important factor that contributed to the declined in the share prices of the TPG Telecom Ltd is the “changes in the management earnings forecast”. The management of the company held the non-current investment of the group’s ownerships in the Covota Ltd. The value of the non-current investment decreased beyond the management earnings forecast and as a result there was a decline in the share prices of Covota that ultimately contributed to the fall in the share prices of TPG Telecom Ltd TPG (Busco 2016).

The industry factors suggest that the decline in the share price was primary because of the slow growth rate and the analyst forecast have suggested that would continue to remain slow. The “macroeconomic factors” on the other hand states that the company has cut the dividend to 2 per cent that ultimate resulted in forecasted decline for the financial year of 2018 (Adams 2017). Amid these factors the company “significant announcement” included an increase in the debt facilities by additional $750 million. As a result this enabled the company to fund its capital expenditure for its mobile network along with the spectrum with the help of debt instead of using equity (Du Plessis Hargovan and Harris 2018). This ultimately contributed to the late rise in the price of shares for TPG Telecom Ltd.

Graphical Representation of Share Price Movement

Another important factor that contributed to share price of TPG Telecom Ltd is the impact of competitors. The announcement of the company stated that it anticipates a lower profit forecast for the entire group based on the recent release of the data obtained from the “Australian Coopetition and Consumer Commission and Competitors” (Amran, Lee and Devi 2014). The NBN can be considered as the one of the primary reason for the lower stock price by 55.7% since TPG Telecom Ltd had to pay more money to obtain the access of the fibre broadband network (Tricker and Tricker 2015). The “industry wide factors” such as decrease in the Australian market average contributed to the falling share price of the company over the last year.  

Beta Calculated of TPG Telecom Ltd: 

The calculated beta for the TPG Telecom Ltd stands 1.95.

Calculations of Required rate of Return: 

As evident from the above stated computation an assertion can be bought forward by stating that the risk free rate stood 4% while the market risk represented 6%. Therefore, the computed value of the require rate of return for the TPG Telecom Ltd stood 15.70%.

Justification behind the “Conservative Investment”

The rationale for making a conservative investment in the TPG Telecom Ltd is because the company has better value in terms of earnings as compared to the other Australian telecom industry average (Ioannou and Serafeim 2017). Additionally the company is also regarded as better value based on the earnings in comparison to the Australian market. The revenue growth of the company is anticipated to go past the Australian market average of 3.6%.

The rationale for making a conservative investment in the shares of TPG Telecom Ltd is because the company has rendered more than 20% yearly growth in earnings over the period of five years (Armstrong et al. 2015). Furthermore, TPG Telecom Ltd uses its assets more efficiently than the other Australian telecom based industry average as the company recorded an 8% growth in the return assets which is better than the last year industry average.

The rationale for making a conservative investment in the shares of TPG Telecom Ltd is because the debt is nicely covered by the operating cash flow of 45.9 per cent which is 20 per cent higher than the total amount of debt. Furthermore, the interest coverage payments on the debt for TPG Telecom Ltd is nicely covered by the earnings. The dividends of TPG Telecom Ltd has increased over the period of last ten years with the dividends that is paid by the company is thoroughly covered by the net profit (ArAs 2016). Therefore, the rationale for making an investment in the shares of TPG Telecom Ltd could be considered as the viable options.

Factors impacting Share Price Movement

Implications of Higher WACC on Management’s evaluation: 

On the event of higher weighted average cost of capital there is a signal for higher risk that is related with the organizations operations. Usually investor’s needs added return in order to assume any added amount of risks (Davies 2016). A company’s WACC is employed as the vital tool of determining the expected cost involved in financing the overall resources (Ijiri 2018). This usually consists of payment made relating to the debt obligations or the cost involved in financing the debt together with the required rate of return needed for management ownership or cost involved in financing of equity.

Majority of the listed companies possess multiple sources of funding therefore the weighted average cost of capital makes an attempt to create a balance out of the relative costs of varied sources to generated one figure of cost of capital (Zabarankin, Pavlikov and Uryasev 2014). In actual theory the Weighted Average Cost of Capital constitute the expenditure that is involved in the raising one added dollar of money (Berk and Van Binsbergen 2016). There could be value investors that may express concern on noticing that the weighted average cost of capital is greater than the original return. This provides an indication that the company might be losing its value with more effective return available to the shareholders somewhere else in the market.

Debt ratio: 

Debt ratio refers to the financial ratio that measures the degree of organizations leverage (Warren and Jones 2018). This is the ratio of total debts in proportion of total assets. The debt ratio for TPG Telecom Ltd stood 0.52 during the year 2016 while in the subsequent year of 2017 the debt ratio declined to 0.39. It can be stated that the debt is not covered by the short term assets (Schaltegger and Burritt 2017). The level of debt for the TPG Telecom Ltd stands 56.1% in comparison to the higher net worth which is 40% greater.

The level of debt over the period of five years have increased. However the effective management step undertaken has reduced the level of debt and the debt is well covered by the operating cash flow which is 45.9% and 20% greater than debt (McKay and Haque 2016). Additionally the interest payment on the debt is well covered by the earnings. To reduce the debt TPG Telecom Ltd uses the proceeds derived from the raising of capital and other cash produced in the accounting year to reduce its debt by $450 million.

Dividend policy: 

The dividends paid by the TPG Telecom Ltd during the financial year of 2016 stood 7.5 cents each share while in financial year of 2017 the dividends paid stood 8 cents per share. The board of TPG Telecom Ltd is highly conscious regarding the interest of the shareholders in securing the returns through the dividends and the company is favourably disposed of increasing the dividends over the time (Barillas and Shanken 2018). The company in its declaration stated that it would reduce the final dividends by 2 cents per share in the year 2017 and the company has re-applied the dividend reinvestment plan at a discount of 1.5%.

To ABC

New South Wales Australia

Dear Sir,

We would like to draw your attention towards the findings obtained from the analysis of TPG Telecom Ltd so that we can provide you with recommendations that would be valuable in making investment for obtaining future profits. The share prices of the company is current trading at a cheaper price. Purchasing the shares of great company having a robust outlook at the lower price is always regarded as the better investment.

Furthermore, TPG Telecom Ltd has produced AUD $722.70 million in the form of operating cash flow during the year 2017 leading the operating cash flow to total debt ratio of 79.87%. This means that the debt of TPG Telecom Ltd is appropriately covered its operating cash. The TPG Telecom Ltd dividend is lower than the risk saving rate of 2.48%. Furthermore, the company has better dividend per share reported over the period of last ten years and the dividends are comprehensively covered by the net profit. Hence making an investment in the shares of TPG Telecom Ltd could be considered as the viable options.

We anticipate the information provided has helped in serving your interest and look forward to serve you in future again.

Thank You

Conclusion: 

On a conclusive note it can be stated that even though the market share of TPG Telecom Ltd has slipped by 1% during the last 12 months the company has more wider to the fibre broadband network in comparison to other firms in the market. As depicted in the report the company over the past five years has rendered growth in earnings. The market depiction states that the company’s yearly revenue growth is anticipated to goes past beyond the Australian market average. On the overall basis, TPG Telecom Ltd can be considered as one of portfolio for the investors to keep an eye with company being the consistent provider of dividend over the last ten years.  

References

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