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Writer's pictureCharles Miller

$TUA - Poor Risk/Reward at $1bn Mkt Cap. A top pick in a pullback (i.e. $1.65 mark)

This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should consider your financial situation and goals before making investment decisions.


Background - Researching now for an entry point in the future

There is no doubt – David Teoh is a weapons-grade operator of telcos. No stat proves this point better than the fact he grew the $TPG share price by an 18% CAGR over 2010-20.


This being said, as a holder of $TUA, I am not comfortable with its $1bn Mkt Cap (and I will outline why) given the likely slowing growth in mobile, early stages of broadband & required capex to achieve future growth. Most importantly I will outline what kind of range I would consider loading up on $TUA ($1.45- $1.65/share).


What's more, I feel the elevated $TUA's valuation at a time when 'mid-caps' are being punished for low cash conversion means the risk of an earnings miss is elevated.


What $TUA has achieved in Singapore Telco

  • When you look at $TUA's growth in Singapore Mobile, their increase in market share is the type you don't want to input into a DCF... they have gone from 2% to 10% Singapore Mobile market share in 3 years.

  • Extrapolating this growth would be foolish, however, what you can do is assume goalposts - 13% (Base) to 15% (Bull) mkt share in 3yrs:

    • Iliad (a disruptive French telco) peaked at 17% penetration and its growth rate slowed materially past mid-teen levels as others closed out their growth

    • StarHub & M1 both have 25% & 20% market share respectively and it is plausible $TUA get another 3-5% market share from them but this will likely be over a much slower rate

    • $TUA's ability to drum up interest in eSim model will dissipate over time as will their net subscriber additions as they aim to push past S$9.4/month

Set out below is $TUA's growth in Singapore mobile

In looking at this great growth in mobile, it is important to remember that $TUA has worse lower spectrum data which means they have much poorer signa


What $TUA aims to achieve in broadband

  • $TUA do their commercial launch of broadband this month. This will be launched with NetLink Trust

  • Based on SingTel's results - Broadband prices are S$33-39/month and their 43% mkt share = S$270m (i.e. >$600m). Their strategy will be simple

    • Discount heavily to S$20/month (marginally above the wholesale cost of S$14/month)

    • Cross-sell to phone customers (noting they are unlikely to lift mobile prices more than customers as this is important for cross-sell)

    • They will be piggy-backing on others' networks which has two implications

      • $TUA will quickly bring to market with uniform levels of performance

      • Not being integrated results in much lower margins

  • To build this out, what we can assume is

    • Sales price = $20/month

    • Wholesale price = $14/month

    • Opex = $2/month (however this will flex more with roll-out sequencing)

Reasons to be bearish

  • One-off factors are impacting their P&L

    • Other expenses likely $6m as they ramp up 5G/4G usage (previously $1m)

    • Capex run rate has lifted to $45-50m (previously $35m)

    • OpCF Conversion = 125% when should really be 100% tops

    • At the current point in time, trying to estimate the topline growth in Tuas is genuinely difficult given their strategy is topline growth over margin for example

  • I do not consider there to be a need for a fundraiser soon, however, I do think

    • All else being equal, $TUA will likely have <$30m in the bank at the end of next year because they will spend big on broadband

    • Sell-side brokers are planting the idea of M&A/Consolidation or offshore expansion

    • Teoh could look at entering the wholesale market earlier than expected which would ramp up capex profile

  • Net of capex, they won't be cash flow positive until at least 2025

Reasons to be bullish

  • There are likely to be future sources of operational leverage

    • $TUA can easily cross-sell broadband to mobile customers with limited marketing spend

    • They are 'relatively' subscale a will likely realise future efficiencies in their call centre staff and backhaul fiber capacity

  • Whilst I consider it to be a while off, there are favourable macroeconomic tailwinds in Malaysia/Indonesia which could be an obvious place for $TUA to expand

  • They are early-on in lifting their mobile pricing and logically they could transition closer to S$15 whilst still remaining competitive (noting their performance is lower than these competitors)


Valuation considerations Based on the following, I think it is fair to assume:

  • Revenue growth - Their speed to market in Broadband will mean 2024/25 are bumper years for growth. Beyond that, it is anyone's guess... but you can assume there will be growth future drivers (i.e. Malaysia expansion, wholesale customer expansion)

  • EBITDA Growth - A mature Telstra delivers 35% EBITDA margins. Given TPM achieved a lower opex cost base than Telstra, I have assumed they can achieve >35% margin long-term

  • Working capital: - Whilst they likely run negative working capital I have assumed no benefit

  • Capex - This is the biggest unknown. Given their poor lower spectrum and roll-out for 5G, it could very well be high in 2025/26. However, I think it could come down to $25-30m p.a. beyond that

  • Tax - They have carried forward tax losses


Conclusion

  • The huge lift in mobile market share for $TUA has led to a run-up in the share price at a time when other mid-caps have been punished and relative valuations have come down. Even with David Teoh at the helm, 29x EV/EBITDA is not appealing at a point where Capex (5G Rollout) & Opex (Carrier Usage) are growing and mobile growth is slowing.

  • I consider a reasonable entry-point for this business to be A$1.65 noting that the high growth means an 'accurate' DCF is hard

  • Long term, I think $TUA's strategy of being an integrated operator in Singapore is compelling and I think there is significant alignment meaning shareholders will be long-term focused (compared to incumbents)


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