Moelis Warns On TPG Telecom

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

By Rudi Filapek-Vandyck

TPG Telecom's ((TPM)) recent FY10 results revealed growth in earnings per share of no less than 45%, but investing in the share market is all about what lies ahead, not what happened yesterday, reminds us Moelis telecom analyst Adam Michell. He sees dismal growth figures ahead for one of Australia's recent success stories in the telecom sector, predominantly because mogul Telstra ((TLS)) is intent on spoiling the party for everyone else in the sector. Investors should note the same theme is apparent in analyst reports following the recent market update by Singapore Telecom's ((SGT)) Optus.

Consensus estimates for TPG are still assuming double digit growth figures for the years ahead, but Michell is suggesting this will prove too optimistic. His estimates only assume low single digits growth instead. The obvious suggestion to make is that if Michell proves correct, than others will have to cut their projections at some stage and this is likely to put downward pressure on the TPG share price. Three weeks ago, analysts at RBS downgraded their rating to Hold for exactly the same reason as Michell's – Telstra becoming more competitive.

Michell suggests mounting pressures on TPG's margins won't become apparent until the second half of fiscal 2011. No surprise, Moelis rates TPG a Sell. As mentioned above, RBS moved to Hold last month. Macquarie and BA Merrill Lynch still have an Outperform/Buy rating. Consensus price target is at $2.03, suggesting potential upside in the order of 31% – though Moelis' Michell would strongly disagree. He has a target price of $1.30.

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