? Operational Momentum — TPG delivered an impressive 1H13 result, with revenue growth of +10% yoy and reported NPAT up +41% yoy. Underlying financials were 3- 6% ahead of consensus forecasts and management raised their guidance. Operational KPIs were the standout, with solid growth in broadband and mobile. We lift our NPAT by +9% FY13e, target price to $3.30 per share and upgrade to Buy.
? Bundling Subs Delivers Growth — TPG was the stand-out performer among ISPs from the 1H13 reporting, adding +36k broadband subscribers (+66k bundle subs). The growth in broadband is consistent with the Citi analysis of Telstra Wholesale numbers outlined in February 2013. We lift our broadband net adds forecasts to +63k in FY13e (from +41k) and +44k in FY14e (from +38k) to reflect the momentum.
? Margin Pressure but Profits Up — TPG actually held underlying broadband margins flat yoy at 39% in 1H13. We were encouraged by this performance, given the shift in the subscriber base towards lower gross margin bundled plans. We forecast margins to remain stable in 2H13e, but expect some compression from FY14e onwards. Nevertheless, we still forecast actual EBITDA higher, underpinned by revenue growth.
? Mobile Adding Value — Consumers are embracing mobile from TPG, with 50% of new subscribers taking a bundled broadband and mobile plan offer. Mobile net adds of +48k in 1H13 were ahead of expectations. We lift our mobile subscriber net adds forecast to +85k in FY13e to reflect the run rate, up from our prior forecast of +41k.
? Changes to Forecasts — We lift our underlying NPAT forecasts by +9% in FY13e, +13% in FY14e and +15% in FY15e, largely driven by an increase to revenue and subscriber growth. Our EBITDA forecast in FY13e is +2% ahead of company guidance range. We lift our target price to $3.30 per share on the back of our upgrades.
? Upgrade to Buy — TPG are executing on their strategy. Our previous Neutral rating on the shares reflected concerns on margin compression and a high valuation. These results have highlighted the positive operational momentum in subs and revenue growth and resulting earnings growth outweighs the margin risk. We believe the business deserves to trade at a premium to peers, and hence the upgrade.
TPM Price at posting:
$2.98 Sentiment: LT Buy Disclosure: Not Held
