TPG Telecom on receiving end of second day of brutal sell-offs

Analysts split on whether the rerating of TPG Telecom is over after the group suffered a second day of sell-offs.

Investors are off the TPG Telecom bus. Picture: AAP

Analysts are split on whether the savage rerating of TPG Telecom is over after the group was on the receiving end of another brutal sell-off yesterday.

More than $2.7 billion has been slashed from the David Teoh-led group’s valuation across two days as investors look past initial worries around 2017 guidance towards a long-term outlook plagued by the threat of shrinking margins.

TPG’s closest peer, Vocus Communications, has been hit by the backwash, with $550 million being wiped out through declines of 3.6 per cent and 10 per cent across two days.

The rising sector risk profile is tied to the twin squeeze of strengthening industry competition and higher access fees, with the latter stemming from the looming dominance of the ­government-controlled NBN Co.

Morgans’ Nick Harris has ­assumed the most bearish stance among analysts, hacking a price target on TPG by a third to $7.94 and slapping on a “reduce” rating.

TPG ended trade yesterday at a one-year low of $8.63 after falls of 21 per cent and 7 per cent across the past two sessions.

“As it currently stands, access costs increase by around $28 per month as customers switch from ADSL to NBN, but TPG is only able to increase customer prices by $8.50, which means gross ­profits halve under an NBN,” Mr Harris said.

“TPG needs to either double its customer numbers, ­bypass the NBN (using wireless spectrum) or cut costs to offset margin ­pressure.” The impending margin erosion places 18 per cent of the group’s gross profits “at risk”, he said.

Credit Suisse also trimmed its target price, from $9 to $8, while restating its “underperform” rating on the stock. Lead telecommunications analyst Fraser McLeish said “high structural change” in the consumer broadband market, which sees NBN Co desperate to recoup capital costs for the taxpayer, presented a $200m EBITDA (earnings before interest, tax, depreciation and amortisation) headwind.

While downbeat analysis was not hard to find, Citi’s David Kaynes was among analysts urging investors “not to panic”.

“In our view, TPG’s FY2017 guidance is conservative (as usual) and is likely to be upgraded at the H1 result,” he said. “We see near-term NBN costs being more than offset by subs growth and iiNet synergies.”

Citi retained a “buy” rating ­despite trimming its price target by $1.15 to $13.35, with the lower target still offering 50 per cent ­upside for willing investors.

It was joined in the optimists’ camp by Deutsche and Morgan Stanley, which have price targets around the $11 mark.

The margin pressure is a theme through even the most bullish reports, but Deutsche is willing to back the group to secure market share gains, while Morgan Stanley is optimistic that TPG has again provided cautious guidance.