Should I Buy TPG Shares?

TPG operates one of Australia’s largest telecommunications businesses, with brands like TPG, IINet, Vodafone and Lebara. So we take a look and see Should I Buy TPG Shares?

TPG Shares Price

TPG shares over the last 12-months have underperformed the ASX200 benchmark falling 5.78% in the same period. Today shares trade at a market capitalization of $12.4bilion and a price of $6.57.

The market capitalization of the company is similar to other ASX companies such as Tabcorp, Computershare and Qantas.

The S&P/ASX has returned over 29% during the same period. Longer-term holders have also likely been disappointed with the companies share price performance over the past 5-years with the group falling 21%.

TPG group is trading towards the middle of the 52-week range which is $4.81 – $8.23

How To Buy TPG Shares? In order to buy shares in TPG, you will need to open a brokerage account, Prophet Recommends a low-cost CHESS-sponsored brokerage platform such as Pearler.

Should I Buy TPG Shares About

TPG Group owns and operates one of Australia’s largest telecommunications businesses. The group is behind such brands as Vodafone, iinet, internode, Lebara and AAPT.

Should I Buy TPG Shares
Business Segments operating as part of TPG Group.

Should I Buy TPG Shares Dividend History

TPG has recently started paying a dividend in FY21, with the debut dividend of $0.075 per share.

TPG shares typically announce a dividend with the release of its half-yearly results in June and full-year results in December as seen in their financial calendar.

Should I Buy TPG Shares - Dividend History
Should I Buy TPG Shares – Dividend History

Dividends are typically paid twice a year, in March (Final Dividend) and September (Interim Dividend). The latest dividend was announced in June, which puts the group’s dividend yield at 1.14%.

TPG shares currently yield 1.14%, or a grossed-up 1.63%

DPS(TTM)$0.075
Gross DPS(TTM)$0.1071
Dividend yield1.14%
Gross yield1.63%
Payout Ratio16%
DRPNo
DRP Features
TPG Dividend Facts

What is TPG Dividend Policy? TPG Telecom’s dividend policy is to pay a dividend of at least 50% of net profit after tax, adding back one-off restructuring costs and certain non-cash items, being customer base intangible amortization, spectrum amortization and any non-cash tax expense.

Should I Buy TPG Shares for their Dividend?

Based on their current yield TPG does have a decent dividend yield of 1.14%, or a grossed up 1.63%. This may seem attractive compared to the average term deposit yield of 0.4%.

Our ASX research report found that the average dividend yield across the ASX is 3.22% (net).

We never purchase a company based solely on their dividend as this is often not a reliable metric for overall performance. Not all dividend stocks are solid investments. A massive dividend yield can be a red flag as it may be altered due to a massive fall in share price, poor prospects, or a special one-off dividend. For this reason, it is important to consider the business as a whole.

Should I Buy TPG Shares Investor Sentiment

You may ask yourself, what do other investors think of TPG shares? After surveying 120 Investors about their current TPG shares sentiment: BUY-HOLD SELL, as well as their target price over the next 12-months here are the results;

TPG Group Investor Sentiment

The results from this survey show there seems to be no strong investor sentiment on TPG shares. So how much are TPG shares worth? Let’s get into it.

Should I Buy TPG Shares Fundamentals

TPG has a market capitalisation of $12billion, trading on a P/E ratio of 16.4x and a price to book of 1x. The market average across the S&P/ASX is currently sitting at 20.8x, meaning TPG sits below the average. Investors must be expecting lower than average growth.

TPG has $4.4 Billion in debt. TPG’s balance sheet seems to now be in a better position than that of a number of years ago. The debt seems to be well covered by operating cash flow.

Their Net Tangible Assets per share is -$1.45. This means their debt levels are higher than their tangible assets.

Market Capitalisation$12,029,940,598
ASX Rank43 of 2,296
P/E Ratio16.4x
P/S2.2x
P/Book1x
EPS$0.49
DPS$0.075
Dividend Yield1.39%
NTA per share-$1.45
Debt/Equity37.7%
TPG Telecom Group Fundamentals

The group financial performance has been a little underwhelming over the past 5-years in our opinion (the share price seems to reflect this). We would be hesitant to simply take the latest positive earnings and extrapolate that out when valuing the company.

TPG ASX Financial Performance
TPG ASX Financial Performance

Should I Buy TPG Shares Financials

TPG Telecom HY21 Income Statement

As a result of the merger with Vodafone Hutchinson group in FY2020 reported HY21 has been compared against a Pro-forma HY20. The group’s Pro-forma result has been included as if this merger were effective for the full period of HY20.

  TPG Telecom HY21 Income Statement
TPG Telecom HY21 Income Statement

The group in the half-year produced ~$2.6billion of revenue, of which 85% was generated from their service division. TPG interestingly doesn’t seem to make much of the group’s revenue from the sale of handsets.

The group seemed to have generated $435m of revenue from the sale of handsets, while the cost of the handsets was around (-$413m) meaning gross profit on handset sales is less than 1%. The gross profit for the service business is significantly better with a 55% GP margin.

TPG Telecom HY21 Balance Sheet

TPG group have total current assets of $772million vs a total current liabilities of (-$1,283m) meaning that in the short term there seems to be a shortfall. This will likely come from some form of capital measure such as a notes issue, debt issue, etc.

Total shareholder equity currently sits at $11.8billion and debt of $4.46billion leaving the group with a debt to equity ratio of 36%. This is significantly less than a group peer Telstra which has a debt to equity of ~94%.

TPG Telecom HY21 Cash Flow Statement

TPG Telecom reported their first year of free cash flow in quite some time, reporting $28m. The group also paid $173m to shareholders in the form of a dividend.

 TPG Telecom HY21 Cash Flow Statement
TPG Telecom HY21 Cash Flow Statement

TPG Shares Insider Ownership and Trading

TPG ASX Shares Ownership Breakdown

TPG shares are owned primarily by Private Companies at 39% of the float. Public Companies and Individual insiders make up 23.7% and 17.7% respectively. The general public only owns 17.3% of the shares.

This ownership breakdown is typical for larger ‘infrastructure’ companies with a large portion of assets. Private and Public companies typically want to buy into these groups as exposure to the industry and obtain a higher rate of return than ‘cash’.

TPG ASX Ownership Breakdown

We generally like companies with large insider ownership. Skin in the game helps ensure the management’s motives are in line with ours. For large-cap companies’ insider ownership will be lower, 3-5% would be decent. In TPG’s case insiders seem to have significant skin in the game.

TPG ASX Recent Insider Transactions

Group CEO Iñaki Berroeta recently purchased 116,000 shares on market at an average price of $5.17 per share. Robert Milnet also seems to think shares are decent value around the $5-$7 mark.

However, it is worthwhile to point out these transactions for such a highly paid CEO is nearly just a drop in the ocean.

DateValueNameEntitySharesMax Price
11 May 21+$599,580Iñaki BerroetaIndividual116,000AU$5.17
07 May 21+$544,050Robert MillnerIndividual100,000AU$5.44
01 Mar 21+$686,615Robert MillnerIndividual100,000AU$6.87
TPG ASX Recent Insider Transactions
TPG ASX Top Shareholders

Inline with the ownership breakdown the top shareholder is a private company Vodafone Hutchinson Holdings. Retired CEO David Teo also retains a significant portion of shares.

OwnershipNameSharesValue
27.82%Vodafone Hutchison (Australia) Holdings Limited517,345,024 A$3.3b
17.12%David Teoh318,315,608 A$2.1b
12.61%Washington H. Soul Pattinson and Company Limited234,396,121 A$1.5b
11.14%CK Hutchison Holdings Limited207,092,576 A$1.3b
11.14%Vizzavi Limited207,092,576 A$1.3b
Top 5 Shareholder in TPG Group

Hutchison Telecommunications (Australia) Limited (HTAL) is an Australian incorporated listed company (ASX: HTA) which holds a 25.05% equity interest in TPG Telecom Limited (ASX: TPG). CK Hutchison Holdings Limited (CKHH) is the majority shareholder of HTAL.

Company founder and retired TPG CEO David Teoh retains a significant stake in the business at 17%.

Should I Buy TPG Shares Prophet’s Take

At its current valuation, it’s hard to get excited over TPG shares. In terms of earnings and assets, the company seems largely fairly valued without an impressive ROE or ROA to justify the share price.

TPG’s share price has slowly eroded over the last five years with investors now seemingly relying on dividends for returns.

Unless the group can continue to win significant market share in Australia and abroad we are unlikely to get excited about the group. Potentially this may be a acquisition play for a large instituional investor at some point in time, however we cannot justify the risk vs reward for TPG at the current valuation.

We will be interested to see if the group can continue to grow earnings after their Vodafone merger or if this was a once off. Potentially if the group can realise the full efficiencies of the merger we may see a more profitable and sustainable business going forwards.

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