Bullish View on TPG, page-86

@hcraboc

I believe you have your terminology incorrect.

Backhaul networks are existing Retail Service Providers (RSP) networks that are either directly owned or leased by the RSPs. These are the networks that provide connection between NBN's Point of Interconnection (POI) and the World Wide Web.

In Australia, the major owners of backhaul networks are: Telstra, TPG, Optus and Vocus. Other RSPs have to lease capacity from them.

What you refer to "backhaul" is actually called Connectivity Virtual Circuit (CVC) within the NBN networks.

The problem of insufficient bandwidth that you were referring to, actually applies to all RSPs, not just TPG. My opinion on this matter is, the government eventually will have to bite the bullet by either reducing the CVC charges much lower or even scraping it altogether.

For TPG, life under the NBN world is not all terrible. By moving to the NBN, TPG can gradually decommission its network of hundreds of DSLAMs currently sitting in exchanges all around the country. There will be some cost savings for TPG from this.

As for your back of envelope calculation which resulted in your prediction of TPG's profitability dropping to zero, I would like to see how you come up with this conclusion. Otherwise it's hard for people to take you seriously.

TPG's current construction of 4,000kms new dark fibre to Vodafone's various sites will conclude in 2018. The contract guarantees TPG a minimum revenue of $900 million over 15 years. Do you realise that with the upfront capex costs incurred, this $900 million revenue will have minimal variable costs attached to it, i.e. most of them will fall straight into the bottom line?

Not just that, this network extension will also benefit TPG as it builds its own mobile network. You can think of it as a competitor (Vodafone) paying TPG to build the dark fibre network that TPG eventually also needs to build for its own new mobile network.

The Singapore opportunity is a unique one. These are the reasons:
- Government that is keen to introduce new competition into its cozy mobile market
- Government that is supportive and quite business friendly to the new entrant
- A market that is small in area but high population density
- A market whose current offerings by the incumbents are quite "expensive", suitable to be attacked by a low cost operator such as TPG.

Until proven otherwise, I'm still quite confident that the Singapore venture will work out fine for TPG.

As for the Australian mobile entry, I agree with you that TPG paid an expensive price to secure its spectrum. As a shareholder, I admit that it's not ideal that earlier this year TPG had to issue shares at low prices to partly fund its spectrum purchase.

However, I also accept TPG's argument that mobile is the future and that if we want to secure our future, this is something that we just have to pay.

There are many components in building a new mobile network. Luckily for TPG, most of the components are already there: dark fibre network, billing system, customer base, brand name, call centre, etc. These components were built/purchased at a much lower level than their current replacement value.

Therefore, if you look at the mobile venture as a whole, yes, we did overpay for spectrum, but the overall build costs is still much lower than what a completely new player would have to pay if they were to build everything from scratch.

Not only that, TPG also has the benefit of learning from the experiences of other disruptors in other markets. They will be able to imitate strategies that worked and avoid ideas that were not that smart.

The new network is based on 4G technology that is completely data oriented. TPG doesn't have to maintain 2G & 3G legacy networks such as Telstra, Optus and Vodafone.

Your point about 5G spectrum is something that I'm aware of and is concerned about. I agree that it will be a little bit tough for TPG to compete for spectrum in the middle of its largest capex program in its history. We'll just have to wait and see what happens.

There other things that TPG can do to protect its margins. So far, the iiNet acquisition had been handled very well. Although iiNet is also facing margin compression due to NBN, TPG was still able to increase iiNet's EBITDA margin from 18% pre-acquisition to 26% in first half 2017. I'm hoping that next week's result shows that this continues to increase to around 27-28%, which is still lower than TPG Consumer's margin of 38%.

The quiet achiever in the TPG's stable is actually the Corporate business that is much less affected by the NBN. This business segment is now bigger than the Consumer business and its performance has been a real stand out, with its EBITDA margin sitting at 42% in H1 2017.

I recently spoke to an IT professional whose firm provides IT consultancy services to small/medium businesses. He said that nobody can beat TPG in terms of value for money. For just $399 / month, he said that businesses can get a Fibre400 connection which provides an unlimited symmetrical 400Mbps internet. The upfront connection fee is also generally much lower than the competition.

If you have other negative things about TPG that you want to share, I'm all ears. I try as much as possible to keep an open mind and likes it when someones provides an alternative view to my investment thesis.