The Australian telecommunications industry is going through significant change, as the National Broadband Network (NBN) rolls out. In the NBN world, scale is absolutely critical, and the industry has responded to this with a flurry of acquisitions, as companies – notably TPG Telecom and Vocus Communications – build businesses capable of flourishing.
Telstra continues to dominate the overall Australian telecom market, holding about 62% market share by revenue, which means there are two routes available to smaller players: achieve significant scale, or dominate growing niches, for example voice and other multi-media communications over the internet (generally referred to as VoIP).
This week we look at the major junior telecommunications players, and how they are travelling.
TPG Telecom Limited (TPM, $11.98)
Market capitalisation: $10.2 billion
Analysts’ consensus target price: $10.61 (FN Arena)
FY16 forecast yield: 1.2%, fully franked
FY17 forecast yield: 1.4%, fully franked
30 years ago, David Teoh established an IT company called Total Peripherals Group, selling computers. Even when Teoh later moved into providing internet and mobile telephone services, he could hardly have imagined that TPG would grow into a major player in Australia’s telecom market, ranking ahead of Optus as Australia’s second-largest provider of fixed broadband services behind Telstra – and a market capitalisation on the Australian Securities Exchange (ASX) of more than $10 billion.
TPG has grown both organically and through a steady stream of acquisitions that have made it nicely vertically integrated. Along the way TPG has swallowed SP Telemedia, wholesale internet capacity provider Pipe Networks, Australia’s third largest landline company AAPT (bought from Telecom New Zealand in 2013) and most recently, in 2015, major rival iiNet (which had previously bought AAPT’s consumer business.)
TPG owns and operates its own carrier-grade voice, data and internet network infrastructure. It provides a diverse range of communication services to residential users, small and medium enterprises (SMEs), government entities, large companies and wholesale customers. TPG offers nationwide ADSL2+, NBN, Fibre Optic and Ethernet broadband access, telephony services, Internet Protocol Television (IPTV), SIM-Only Mobile plans and various business networking solutions. TPG has its own inter-capital and metropolitan fibre optic networks, and owns the international PPC-1 submarine cable, which connects Australia and Guam, connecting onwards with the USA and Asia.
TPG has been an outstanding stock exchange performer in recent years, with a total return (capital gain plus dividends) of 54% a year over the last five years, as its share price has motored from $1.57 to about $12.
But while analysts predict TPG to have strong earnings growth ahead, an awful lot of that is in the price. On FN Arena’s collation, the consensus of analysts’ price forecasts comes up with a target price of $10.61: Thomson Reuters puts that figure at $11.40. Whichever one you use, TPG is above it – and it is not enough of a yield generator to sweeten that. Analysts expect it to pay 1.2%, fully franked, this year, and 1.4% in FY17. The stock appears to be a hold at best.
Vocus Communications Limited (VOC, $8.65)
Market capitalisation: $4.59 billion
Analysts’ consensus target price: $9.39 (FN Arena)
FY16 forecast yield: 2.2% fully franked
FY17 forecast yield: 2.6% fully franked
Like TPG, Vocus Communications has also swelled through acquisitions over the years to become a telecoms heavyweight, fighting in the trenches with TPG and Telstra for broadband market share. Established as a business telecommunications provider, Vocus built its own fibre and data centre network across Australia and New Zealand, to offer corporate customers internet, fibre, data centres and unified communications services.
In 2015 Vocus merged with fibre-optic internet and data centre business Amcom, which brought it extensive network assets that complemented Vocus’ own fibre infrastructure, as well as new products and capabilities that built on Vocus’ existing managed services, Cloud and security portfolio. But the truly strategic move for Vocus came later in 2015, with a proposal to merge with M2 Telecommunications, a residential broadband provider – and owner of the Dodo, Commander and iPrimus brands – to create Australia’s fourth-largest phone and internet provider.
M2 itself had bought 20 rival companies along the way, scrambling to build enough of a product range and customer base to stay afloat in the highly competitive Australian market. The merger, completed in February 2016, has transformed the enlarged Vocus into a full-service, vertically integrated player with the firepower to boost its market share of in all segments of the Australian and New Zealand telecommunications markets.
Last month, Vocus picked up Nextgen, owner of a national fibre backhaul (the connection that internet service providers, or ISPs, have to the internet) network, which complements the Vocus footprint.
Vocus has also performed well for shareholders as it has grown, delivering total return of 31.2% a year over the past five years. And analysts still see reasonable upside in Vocus: On FN Arena’s collation, the analysts’ consensus target price, at $9.39, offers 8.5% upside to the present price. However, it is not a great yield generator, with 2.6% fully franked expected in FY17. On consensus analysts are a bit more positive than a hold: the most bullish is Deutsche Bank, which rates Vocus a buy, with a target price of $10.70.
Hutchison Telecommunications Australia Limited (HTA, 8.6 cents)
Market capitalisation: $1.2 billion
Analysts’ consensus target price: 7 cents (Thomson Reuters)
Loss-maker: No dividends expected FY16 or FY17
Hutchison Telecommunications Australia (HTA) is an anomaly. It has the exclusive licence to use the Vodafone brand in Australia, it offers 4G mobile telecommunications under the Vodafone brand and has 5.4 million customers. HTA owns a 50% interest in Vodafone Hutchison Australia (VHA), with Vodafone PLC owning the other half. HTA has a partnership with COSBOA (the Council of Small Business Organisations of Australia) to offer small-to-medium-sized enterprises (SMEs) telecommunications services. Last year it signed a 15-year partnership worth more than $1 billion with TPG, under which TPG will extend its current fibre infrastructure by about 4000 kilometres nationally to provide optical fibre to 3000 Vodafone cell sites, and eventually shift its 320,000 mobile customers onto Vodafone’s network.
That’s all great, but the problem is that the listed half-owner of the Australian business, HTA, has not made a profit, let alone paid a dividend, since 2010, and is nowhere near an investable stock. And Thomson Reuters says analysts have a consensus price target on the stock of 7 cents, which is almost 19% lower than where it stands. HTA is for speculators only.
Macquarie Telecom Group Limited (MAQ, $12.25)
Market capitalisation: $257 million
Analysts’ consensus target price: $5.40 (Thomson Reuters)
FY16 yield: no dividend expected
Although it has more than doubled over the past year, Macquarie Telecom (MAQ) has been a pedestrian performer compared to Vocus and TPG Telecom: it has delivered shareholders a total return of just 6.6% a year over the past five years. Listed in 1999, Macquarie Telecom was a $20 stock during the tech boom, but after the “tech bust,” MAQ spent almost eight years becalmed between $1 and $2, before getting moving again in 2009.
Macquarie Telecom is an integrated telco that provides a full range of hosting, data, voice and mobile services to the business and government market. It also offers a range of cloud services including security, storage, backup-as-a-service and virtual hosting/data centre services, through its three data centres, Intellicentres (ICs) 1, 2 (Sydney) and 4 (Canberra).
The third of these is the linchpin of MAQ’s increasingly important government work. Known as the “The Bunker,” IC4 is a state-of-the-art data centre designed to support the Federal Government’s gateway consolidation program, which aims to improve cyber-security and reduce the number of internet gateways used by government agencies from 124 to 7, of which Macquarie Telecom is the first. IC4 is the centre of MAQ’s Secure Government Cloud service, and is supported by more than 100 government security-cleared engineers
The company made losses in FY14 and FY15, but returned to profitability in the December 2015 half-year. On Thomson Reuters’ collation, analysts expect MAQ to report earnings per share (EPS) of 15.5 cents for FY16, its best figure since FY13 and a major turnaround from the loss of 20.4 cents a share reported in FY15. But the analysts’ consensus price target on MAQ makes for dire reading: it stands at $5.40, less than half the prevailing price. And at $12.25, the current share price implies that MAQ is trading at 79 times expected earnings. With no dividend in sight, MAQ does not appear to offer much value at present.
Amaysim Australia (AYS, $1.855)
Market capitalisation: $334 million
Analysts’ consensus target price: $2.26 (Thomson Reuters)
FY16 forecast yield: 4.4%, unfranked
FY17 forecast yield: 5.8%, unfranked
Low-cost mobile phone and data provider Amaysim Australia (AYS) is a relative newcomer to the ASX, but has become Australia’s fourth biggest mobile phone provider behind Telstra, Optus and Vodafone. Amaysim has a wholesale services agreement with Optus and resells services to its customers at retail prices.
Amaysim was capitalised at about $340 million when it listed, at $1.80 a share, and moved smoothly to $3.20 in February, but the party ended after it posted a disappointing half-year result, and admitted it was under pressure from competitors. Net profit plunged 96% to $681,000, because of costs from listing on the ASX, and the acquisition of prepaid rival Vaya. In response the shares fell by 37% to $1.55, from where AYS has recovered ground to $1.855.
Broker Baillieu Holst says the consensus view is Buy, with strong earnings growth likely for FY16 and FY17 and the stock sitting on a FY17 price/earnings (P/E) ratio of 12.6 times earnings and dividend yield (unfranked) of 5.7%. AYS looks to be offering good value.
MNF Group Limited (MNF, $3.98)
Market capitalisation: $267 million
Analysts’ consensus target price: $4.10 (Thomson Reuters)
FY16 forecast yield: 1.8%, fully franked (Thomson Reuters)
FY17 forecast yield: 2.5%, fully franked (Thomson Reuters)
MNF is one of only six carrier-grade infrastructure-based voice network operators in Australia. It provides Internet-based (IP) telecommunication services, which include VoIP (Voice over Internet Protocol) data and video services, to residential and business enterprise. MNF also owns global internet tech infrastructure, having bought the Telecom New Zealand International Voice Network earlier this year.
The company developed out of Symbio Networks, which built VoIP-related equipment and software for internet service providers and other companies in the telecommunications industry The company’s brand portfolio now comprises My Net Fone (hosted communications), Symbio Networks (wholesale carriage and VoIP managed services) CallStream (cloud-based business 13, 1300 and 1800 numbers), Connexus (business internet), PennyTel (budget residential VoIP, mobile and broadband services) and iBoss (wholesale aggregation and billing platform.) Together, these generate a high-margin recurring revenue stream.
MNF has been a highly rewarding stock, racking up total return of 92% a year over the last five years, and becoming a fully franked dividend payer – although the yield is not spectacular. The international voice business should generate further growth in the near term. Management has told the stock market to expect 17% net profit growth for FY16 – anything better than that would be rewarded by the stock market.
The ASX also hosts two major telecoms stocks from across the Tasman: Chorus and Spark were once Telecom New Zealand but were split into wholesale and retail businesses.
Spark New Zealand (SPK, $3.53)
Market capitalisation: $6.31 billion
Analysts’ consensus target price: $2.92 (Thomson Reuters)
FY16 forecast yield (NZ$): 7.2%, fully franked (NZ)
FY17 forecast yield (NZ$): 7.5%, fully franked (NZ)
Spark New Zealand Limited (formerly Telecom Corporation of New Zealand Limited) is the retail NZ telecommunications service provider, offering a full range of mass-market products, services and support to residential consumers and small businesses. Its business units are Spark Home, Mobile & Business, Spark Digital and Spark Connect. The Spark Digital business provides ICT (information and communications technology) and cloud-based solutions to corporate and government customers
Broker Baillieu Holst says the consensus view is Buy – although the analysts’ consensus target price is well to the downside of today’s share price. The SPK dividend is fully franked for New Zealand tax purposes: the New Zealand imputation credits are not available to Australian residents but the New Zealand government refunds the imputation amount to foreigners, minus 15% withholding tax. This refund is paid as a supplementary dividend.
Chorus (CNU, $4.12)
ASX market capitalisation: $1.64 billion
FY16 forecast yield (NZ$): 4.45%, unfranked
FY17 forecast yield (NZ$) 4.79%, unfranked
Formerly the network arm of Telecom New Zealand, Chorus was spun off in November 2011, when SPK became the mobile network and retail business operator. Chorus operates the Telecom NZ network and infrastructure and acts as a telco wholesaler. It is also building the majority of the NZ government’s ultrafast broadband (UFB) network, the Kiwi equivalent of the NBN. Chorus is building “fibre-to-the-premises” in 24 of New Zealand’s largest 33 population centres, using as much of its existing network as possible. As part of the public-private partnership, the New Zealand government is subsidising this work to the tune of nearly $NZ1 billion ($A930 million). Chorus’ work on the UFB is due for completion by the end of 2019.
Chorus has been a sound performer on the ASX, generating total return of 23.7% a year over the last three years. Broker Baillieu Holst says the consensus view is Buy, but the broker also cites an analysts’ consensus target price of $2.76.
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