TPG Telecom (TPM.Australia) tumbled 6% on Wednesday following...

TPG Telecom (TPM.Australia) tumbled 6% on Wednesday following Tuesday’s 21.6% slide, after the Australian telecom said its fiscal year 2017′s operating profit growth will be only half as much as the market had expected.
TPG Telecom now expects to report 7% operating profit (EBITDA) growth for fiscal year 2017 to between AUD 820 million and AUD 830 million, well short of the street expectation of 14% growth. The shortfall likely came from retail broadband, where CVC charges and higher marketing costs from tougher competition are driving down TPG’s profit margins.
Morgan Stanley cut its price target from A$11.40 to A$10.75 but remains positive on the stock nonetheless. TPG was trading at A$8.75 this morning. Analyst Andrew McLeod wrote:
1) TPM’s retail broadband margins are set to start falling in F2017, which is earlier than we initially expected … but, no change to our long-term ~28% EBITDA margin assumption: We estimate that TPM can generate an EBITDA margin of 26% on its NBN broadband plans, above the market’s long-term expectations. NBN margins will fall, but ROIC actually improves. We forecast TPM’s NBN ROIC to be 12%, above the combined IIN/TPM F2016 ROIC of 10%.
2) TPM’s corporate division upside remains: Revenue +2%, adjusted EBITDA +15% in F2016, ahead of expectations. Further share gains forecast in F2017-19.
3) TPM’s FTTB network or ‘mini-NBN’ still presents significant medium-term earnings/valuation upside: We have written about this in detail before; to be clear, this made zero contribution in F2016. The company states that it plans to activate the network in F2017; progress with subscriber take-up rates, ARPU, etc over the next 12 months will be critical to our thesis.
Our PT includes i) a valuation for TPM’s core business of A$10.00 and ii) a valuation of A$0.75 for TPM’s FTTB network. In deriving A$10.00 for the core business, we derive a range of A$8.29 to A$10.71/share, across three methodologies: DCF value (A$10.70), P/E (A$10.39) and SoTP (A$8.29). Reliance on the DCF is higher. Also, the FTTB valuation is DCF-based.