TPG would lag in 5G race: analyst

The telco may not reach its target EBITDA breakeven revenue of $150m.

Australia-based telco TPG is expected to struggle in Singapore’s 5G era, no thanks to lower mobile revenues in 2020 and multiplayer competition pressures, according to an analyst report by DBS Group Research.

Singapore’s mobile revenue is projected to drop 6-7% in 2020, which could likely hit the telco as they are yet to launch its services in a few weeks. The joint StarHub-M1 bid for 5G may also reduce their future capex boosting free cash flow and facilitate a transition to a three-player market structure.

DBS noted that Singtel’s attractiveness is also increasing, with a yield of 5% and earnings CAGR of 5% over FY2020-2022 led by Bharti’s turnaround. It also trades at a wider holding company (HoldCo) discount at 22% from its former 15% discount. Furthermore, Netlink also has an attractive 5% yield and has a unique business model of being largely immune to economic cycles, whilst Starhub trades with a 6% yield.

The report stated that TPG aims to achieve EBITDA breakeven with 400k subscribers at $10 monthly ARPU. This translates into $48m annual revenue compared to DBS’ EBITDA breakeven revenue estimate of $150m.

“The difference may be largely due to accounting, treatment. It seems to us that most network-related expenses (including the fee paid for accessing MRT tunnels) are captured under the capex (A$211m over the last 30 months), which should lead to higher depreciation (partly cash) expenses after the commercial rollout. TPG may not break even below $150m revenue on a cash basis excluding the capex, and 5G is another big challenge,” said DBS’ analyst Sachin Mittal.

In addition, the 400,000 users of TPG’s free services may churn out upon the telco’s entry as it becomes a paid service. This will boost the postpaid mobile revenue of existing players. And despite its prepaid segment targeting foreign workers and tourists, TPG may see more competition that requires an extensive distribution network.

“Anyway, prepaid comprises less than 20% of total Singapore mobile revenue and even a 20-30% drop in prepaid ARPU of existing players will have 4-6% adverse impact on existing players’ mobile revenue,” Mittal added.

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