TPG Telecom Pins Hopes On 2025

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After a disappointing 2024, TPG Telecom looks to its new regional expansion deal to double cash flow in 2025. Analysts are cautious.

-TPG Telecom’s postpaid decline disappoints in 2024
-MOCN deal with Optus could double cash flow in 2025
-Sale of EGW would further bolster balance sheet
-Analysts find better value in Telstra

By Greg Peel

TPG Telecom’s ((TPG)) 2024 result and 2025 guidance were broadly in line with consensus expectation. Revenue fell -0.7% year on year while earnings rose 3.4%. Guidance is for flat earnings growth in 2025 on 2024.

The key surprise for analysts was a fall in postpaid mobile subscriber numbers. Postpaid subscribers declined by -49k in the second half following a -47k decline in the first half.

Jarden had expected TPG to benefit from a combination of the Telstra ((TLS)) and Optus 3G network shutdown, on top of Telstra price increases, but this did not eventuate. Telstra booked 49k postpaid net adds in the December half while Optus added 51k.

The -3% fall in postpaid subscribers may limit TPG’s next round of mobile price increases, Morgan Stanely suggests.

The telco itself attributed the decline to competition from Optus handset subsidies, and a strategic delay to marketing given the launch of the multi-operator core network (MOCN) on 30 January.

Doubling Cash Flow

Under the regional MOCN agreement signed last April, Optus will provide TPG Telecom with access to its regional radio access network and both will share spectrum in regional Australia. Once implemented, TPG’s retail and wholesale customers (including TPG, Vodafone, iiNet, Lebara and felix customers) will use Optus’ 4G and 5G regional network on an equivalent basis to Optus customers.

2024 is old news, says Morgans. It’s all about 2025.

Having now doubled its network coverage, TPG/Vodafone has kicked off an aggressive marketing campaign in order to accelerate mobile growth, Morgans notes. Mobile growth was subdued in 2024 due to lower inbound students and tourism, but it also appears TPG withheld some of its marketing budget to go harder in early 2025.

TPG’s addressable customer base nearly doubles under the extended network. Were TPG to lift from its current 20% market share to 30%, Morgans calculates it could lift its customer base by some three million customers. The broker is, however, not forecasting significant improvements anytime soon, but hopes to be wrong.

TPG has indicated a strong initial customer response to its expanded network, with the highest rate of net adds since December 2022 despite lower immigration since the launch. Jarden therefore assumes postpaid net adds of 30k in the first half of 2025 and prepaid net adds of 50k, with potential risk to the upside.

Prepaid subscribers grew by 79k in the second half of 2024, ahead of Jarden’s 50k estimate, which the broker puts down to further cost of living pressure. At the market level, Jarden estimates TPG’s total handset subscribers grew by 331k, with Telstra net handset adds of 119k (36% share of net adds), Optus by 152k (46%), compared with TPG’s net adds of 60k (18%), in line with TPG’s total share of the market.

Earnings may not grow in 2025, and will be second half-weighted, but free cash flow will, Jarden notes. While the broker’s base case assumes effectively flat earnings year on year, free cash flow will materially step up as a result of a -$125m reduction in the year on year drag from handset receivables, and a -$230m reduction in capex, including spectrum.

Jarden forecasts equity free cash flow to double to $468m in 2025 from $235m in 2024.

Balance Sheet Benefit

On 27 March, the ACCC is expected to provide its preliminary view on whether TPG can proceed with the divestment of its fibre network infrastructure assets and Enterprise, Government and Wholesale (EGW) business unit to Vocus.

After many years in negotiations, a deal was finally announced in October 2024 and is subject to regulatory approval. If approved, the deal is expected to net TPG $4.7bn ($2.50 per share). It would come with a sizeable lease liability and should materially improve TPG’s balance sheet. Morgans suggests this would open the door for capital management and greater reinvestment in its mobile business which is TPG’s key profit driver, given it has the highest gross profit margins.

Morgan Stanley points out TPG’s second half dividend of 9.0c, makes 18.0c for the full year. TPG has effectively borrowed in order to pay this high dividend, as net debt increased from $4.0bn to $4.1bn.

The handset receivable financing unwind and conclusion of IT modernisation in 2023, plus conclusion of the 5G rollout (72% complete), are reinforced by a reduction in cash capex post the EGW sale, Macquarie notes. Continued strong mobile growth looks incrementally more attractive if TPG can deliver its flat year on year opex guide.

A potential new receivable financing deal would provide further working capital tailwinds. If the Vocus deal is approved, TPG plans to host an investor day and update the market on its capital management plans.

Little Faith

TPG’s accelerating decline in postpaid subscriptions in the second half, despite competitor price rises, and the return to growth in early 2025 following MOCN/promotional discounting, is the key concern for Goldman Sachs, who questions TPG’s ability to expand average revenue per user (ARPU), and for sustained industry rationality.

Can Telstra/Optus raise prices if Vodafone doesn’t follow? Goldman believes so, noting TPG continues to target subscription and ARPU growth, and that Telstra/Optus delivered strong postpaid net-adds, with Telstra believing its recent porting data and customer value perception metrics remain positive.

Goldman Sachs applauds TPG’s cost discipline, but can’t get past postpaid declines, maintaining a Sell rating and $4.20 target.

Morgan Stanley retains an Underweight rating, preferring Telstra Group ((TLS)) (Overweight) given higher earnings growth, a rising dividend and a stronger balance sheet. It doesn’t feel appropriate to the broker that both stocks are trading on same 7x FY26 enterprise value to earnings multiple.

UBS also points out TPG shares are trading on a similar multiple to Telstra, but offer a lower dividend yield and lower return on invested capital — 6% to Telstra’s 8%-plus. UBS has a Neutral rating, cutting its target to $4.80 from $4.95.

Morgans has a Hold rating and $4.70 target, down from $4.80. This broker thinks TPG will benefit from continued rational mobile pricing lifting profits, improving return on invested capital and pleasingly, self-help. Morgans believes TPG’s value brand should resonate strongly with consumers given the cash crunch from higher interest rates and consumers taking a tighter view on cost control. However, to-date this has not eventuated, the broker points out.

Jarden nonetheless retains an Overweight rating, cutting its target to $5.20 from $5.25.

Macquarie is on research restriction.

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