TPG Telecom - Macquarie · We resume coverage on TPG Telecom with an Outperform recommendation and a $10.40/sh target price. TPG is a cost-efficient and scaled fixed line telecoms

Please refer to page 17 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

TPM AU Outperform

Price (at 08:19, 16 Sep 2015 GMT) A$9.70

Valuation A$ 9.53 - DCF (WACC 8.3%, beta 1.2, ERP 5.0%, RFR 3.8%, TGR 3.0%)

12-month target A$ 10.40

12-month TSR % +8.9

Volatility Index Medium

GICS sector Telecommunication Services

Market cap A$m 7,925

30-day avg turnover A$m 14.4

Number shares on issue m 817.0

Investment fundamentals Year end 31 Jul 2014A 2015E 2016E 2017E

Revenue m 969.2 1,245.3 2,076.8 2,247.3 EBIT m 256.9 331.2 537.9 627.1 Reported profit m 171.7 222.8 278.5 388.3

Adjusted profit m 191.6 244.8 331.6 392.8 Gross cashflow m 271.9 364.2 520.0 585.1 CFPS ¢ 34.3 45.9 63.8 71.6 CFPS growth % 26.3 33.9 39.1 12.3 PGCFPS x 28.3 21.1 15.2 13.5 PGCFPS rel x 3.60 2.47 1.89 1.86 EPS adj ¢ 24.1 30.8 40.7 48.1 EPS adj growth % 35.5 27.7 31.9 18.2

PER adj x 40.2 31.5 23.8 20.2 PER rel x 2.85 2.11 1.68 1.60 Total DPS ¢ 9.3 11.8 16.3 19.2 Total div yield % 1.0 1.2 1.7 2.0 Franking % 100 100 100 100

ROA % 20.5 20.9 20.5 17.4 ROE % 24.8 27.0 27.9 25.9 EV/EBITDA x 21.9 16.6 11.1 9.9 Net debt/equity % 38.8 29.1 113.6 80.5 P/BV x 9.3 7.9 5.7 4.8

TPM AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, September 2015

(all figures in AUD unless noted)

17 September 2015 Macquarie Securities (Australia) Limited

TPG Telecom Bigger is better Event

Following a period of research restrictions, we resume coverage of TPG

Telecom with an Outperform recommendation and $10.40/sh target price.

Impact

Well positioned infrastructure player: TPG has extensive fixed line

infrastructure assets serving customers in both the Consumer and

Corporate/Wholesale markets. This provides TPG with a strong growth

platform and allows it to drive operational leverage from new customers.

Coupled with its ongoing focus on operational cost efficiencies and scale

gained from the iiNet acquisition, we believe TPG is positioned to hold a

sustainable cost advantage and price differentiated product in an increasingly

competitive fixed line environment as the NBN rolls out.

Significant synergies from iiNet transaction: We forecast $70m in

synergies over 3 yrs from a combination of network and general operating

expenses. Further cost savings could be achieved from cuts to the iiNet brand

and customer service offering, however we only see this as making sense if

broadband products become commoditised in an NBN world, in which case

iiNet’s differentiated market position would no longer be justified.

Scope for upside from ACCC Fixed Line pricing review: Incremental to

this, TPG is well positioned should the ACCC lower regulated access pricing

for copper services, as flagged in its recent draft paper. Assuming a 9.6% cut

to pricing, consistent with the draft paper, we would see ~5.1% upside to our

FY16E EPS (10 months’ impact) and 3.4% to FY17E EPS assuming 25% and

50% pass-through to customers respectively in those periods.

Resuming coverage with an Outperform and target price of $10.40/sh:

Our target price of $10.40/sh is based on our DCF analysis and implies an

adjusted FY16 PER of 25x. While this does imply a premium to telco and

ASX100 peers on an earnings capitalisation approach, we see this as

reflecting TPG’s strong growth prospects and cash conversion, further upside

potential to earnings and valuation from the ACCC pricing review, scope for

synergies to exceed the $70m we have forecast, and potential for future M&A.

Downside risks predominantly relate to increased competition, greater than

expected margin contraction as the NBN rolls out, and iiNet integration risks.

Earnings and target price revision

Underlying EPS changes are: FY15 +0.2%; FY16 +15.4%; FY17 +23.9%

which incorporates the acquisition of iiNet and general modelling adjustments.

Also, we have moved the amortisation of acquired customer bases to be an

adjusting item. We expect the iiNet acquisition will create a significant

amortisation entry that will distort future earnings and multiples if incorporated.

Including the removal of customer bases and brand name amortisation from

adj earnings, EPS changes are: FY15 +10.1%; FY16 +19.5%; FY17 +25.4%.

Price catalyst

12-month price target: A$10.40 based on a DCF methodology.

Catalyst: FY15 result (22 September). Fixed line FAD (end of September).

Action and recommendation

We resume coverage with an Outperform recommendation and $10.40/sh

target price.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management TPG Telecom

17 September 2015 2

Investment overview

We resume coverage on TPG Telecom with an Outperform recommendation and a $10.40/sh

target price. TPG is a cost-efficient and scaled fixed line telecoms operator with strong growth

prospects from both organic growth and the extraction of operational synergies from recent

acquisitions.

Synergy realisation at iiNet: We forecast TPG to achieve $70m in synergies over three

years as our base case, coming from a combination of network and general operating

expenses. Further costs savings could be achieved a few years from now if cuts were made to

the iiNet brand, however we only see this as making sense if broadband products become

commoditised and iiNet’s differentiated market position cannot be sustained.

Broadband market competition increasing – a thematic that will continue as the NBN

rolls out: We discussed at the beginning of the year that competitive intensity was likely to

remain high in fixed line services, primarily driven by the increased aggression from Optus

(refer Australian Telecoms - Key themes for 2015). Despite this, we do expect TPG to

continue to demonstrate solid organic growth as it differentiates on price and expands into

offering NBN services more aggressively. We also see continued growth in per subscriber

profitability as scale builds and from acquisition synergies and potentially lower regulatory

pricing. Over time, per subscriber profitability will contract, in our view, due to the lower gross

profit margins on NBN lines, with this earnings headwind to pick-up from FY18 as the NBN

gains momentum.

Scope for further growth from TPG’s Corporate business: TPG is well positioned for

further growth in its Corporate and Wholesale operations, where it currently has a ~10%

market share, and the market structure is fairly stable. Upside will come from increasing

utilisation of existing network as well as further network rollouts.

FTTB and regulation: we do not see FTTB as a meaningful value creator for TPG. The

impost of separation, potential regulation of the service, capped wholesale pricing, a potential

industry levy, and a competitive rollout from NBN, will ensure this. TPG will be able to derive a

palatable economic return however, and the network extension will create scope for additional

products in time and may feed into its ultimate wireless strategy.

Cash flow and balance sheet: TPG is highly cash generative. It frees up working capital as

it continues to grow and cash conversion typically exceeds 100%. The high level of cash

generation will assist in reducing gearing levels that will reach around $1.88bn post this

transaction with ND/EBITDA of ~2.5x on a pro-forma basis. We see this falling to 2.1x by the

end of FY16, and to 1.2x by FY18.

Further M&A opportunities: We expect that M&A will remain an important thematic for TPG.

Having said that, it is unlikely that TPG will embark on further M&A in the near term as it beds

down the iiNet transaction and pays down its debt. With a longer term view, we do see scope

for TPG to pursue acquisitions where it can leverage its network or for strategic advantage.

Ultimately, a tie-up with Vodafone would make sense as the architecture of fixed and mobile

networks converges.

Our $10.40/sh target price is primarily based on our DCF analysis. We have cross-checked this

from a PER and EV/EBITDA basis against telecom peers and ASX 100 companies in the context

of growth prospects on offer and are comfortable with the premium implied. Upside risk exists if

TPG is able to achieve greater than our $70m synergy target, from lower regulatory pricing, or

through leveraging its network assets in future M&A transactions. Downside risks predominantly

relate to increased competition, greater than expected margin contraction as the NBN rolls out,

and integration risks with iiNet.


17 September 2015 3

Fig 1 TPG divisional earnings summary

$m FY13 FY14 1H15 2H15e FY15e FY16e FY17e

Broadband 403.1 478.4 264.0 271.1 535.1 1,331.0 1,464.3 % ch pcp 19.4% 18.7% 14.4% 9.5% 11.9% 148.7% 10.0% Mobile 68.6 79.1 41.5 42.8 84.3 95.0 106.1 % ch pcp 25.9% 15.3% 6.4% 6.8% 6.6% 12.7% 11.7% Corporate 244.2 406.0 319.3 300.7 620.0 644.8 670.6 % ch pcp (6.0%) 66.3% 162.0% 5.8% 52.7% 4.0% 4.0% Other 8.6 5.7 2.5 3.4 5.9 6.0 6.2 Total revenue 724.5 969.2 627.3 618.0 1,245.3 2,076.8 2,247.3 % ch pcp 9% 34% 0.6 0.1 28% 67% 8% Broadband 152.5 183.8 107.6 110.2 217.8 453.8 519.3 % ch pcp 15.7% 20.5% 19.4% 17.6% 18.5% 108.4% 14.4% Mobile 15.8 16.7 8.7 9.1 17.8 20.1 22.4 % ch pcp (0.4%) 5.7% 8.7% 4.6% 6.6% 12.7% 11.7% Corporate 110.3 160.2 117.7 124.6 242.2 264.0 279.9 % ch pcp 1.4% 45.2% 94.5% 24.9% 51.2% 9.0% 6.0% Other 3.4 4.0 2.2 1.9 4.1 4.2 4.4 % ch pcp 14.9% 17.2% 10.1% (1.4%) 4.3% 3.0% 3.0% Total EBITDA 282.0 364.7 236.2 245.8 482.0 742.2 825.9 % ch pcp 8.7% 29.3% 47.0% 20.5% 32.2% 54.0% 11.3% Broadband 37.8% 38.4% 40.8% 40.7% 40.7% 34.1% 35.5% Mobile 23.0% 21.1% 21.0% 21.3% 21.1% 21.1% 21.1% Corporate 45.2% 39.5% 36.8% 41.4% 39.1% 40.9% 41.7% Other 39.2% 69.3% 90.5% 55.3% 70.2% 70.2% 70.2% Total EBITDA margin 38.9% 37.6% 37.7% 39.8% 38.7% 35.7% 36.8%

Source: Company data, Macquarie Research, September 2015

Assessing the iiNet opportunity

Strategic rationale

TPG’s acquisition of iiNet entrenches it as a clear number two player in the Consumer broadband

segment with a 26% subscriber market share. Increased scale will bring both operational and

network cost efficiencies. Arguably, as we enter an NBN world and fixed line products are

increasingly commoditised, the acquisition will allow TPG to maintain a sustainable cost

advantage over its competitors. This in turn provides flexibility to offer competitively priced

products, while also protecting margin.

From a geographic perspective, the acquisition provides TPG with a stronger presence in the

Perth and Adelaide markets, as well as enhancing its East coast market share.

The acquisition does appear to settle the fixed line competitive dynamic in Australia, with the

ACCC unlikely to permit further consolidation between the five scale players that remain.

Looking at the broader telecommunications space in Australia, the acquisition of iiNet places TPG

as the third most profitable telco – behind Telstra and Optus, and on a pro-forma basis slightly

ahead of Vodafone.


17 September 2015 4

Fig 2 Broadband subscriber market share

Fig 3 EBITDA by operator


FY16 EBITDA estimates unless otherwise stated. *Telstra Domestic EBITDA only (ex PSAA payments). **12m to June 2015 as Macq does not forecast Vodafone earnings. ***Vocus pro-forma FY15 EBITDA (includes Amcom contribution). Source: Company data, Macquarie Research, September 2015

In addition to its Consumer offering, TPG also has an extensive Corporate division that will be

boosted, albeit to a lesser extent than Consumer, by this acquisition. iiNet had grown its business

revenues to $204m or 20% of total revenues in FY14.

Finally, TPG has also acquired iiNet’s mobile customer base. Combined, the Group would now

have around 500k MVNO subscribers on the Optus network. At this scale, it makes TPG the 5th

largest mobile player in Australia (behind Telstra, Optus, Vodafone and amaysim) with a ~1.5%

subscriber share.

Financial implications

We have upgraded our underlying FY16 and FY17 EPS forecasts (excluding customer base and

brand name amortisation) by 15.4% and 23.9% respectively. This reflects the direct impact of the

mostly cash-funded acquisition as well as the achievement of $70m in synergies by FY18.

TPG has significant scale within the industry, although its profitability is still dwarfed by that of

Telstra and Optus. We see capex peaking in coming years at $217m, which incorporates IRU

payments committed by both TPG and iiNet, with underlying capex requirements of the business

at ~$110m.

Longer-term, we see compression in Consumer Broadband profit margins as the NBN rolls out

and margins come under pressure across the industry. Longer-term growth prospects for TPG’s

corporate fibre and wholesale businesses look robust as it leverages extensive network assets

and a largely fixed cost base to deliver aggressively priced products.

Assessing synergy potential at ~$70m within 3-years

TPG has not quantified the potential synergies from the iiNet acquisition. We have estimated the

level of opex synergies to be ~$70m coming from a combination of network savings, scale

efficiencies and reduced duplication. We expect TPG can realise the bulk of these synergies

within 3 years, although some savings will take longer due to complexity (IT/systems integration)

or due to contractual obligations (network savings).

This does assume some savings in customer service related costs at iiNet (iiNet currently has call

centres in Cape Town, Perth, Sydney and Auckland), but assumes that customer service for iiNet

continues to be operated separately to the core TPG customer service platform over the medium

term, and that the iiNet brand is maintained, as stated by TPG management.

Telstra45.3%

TPG26.0%

Optus15.4%

M27.4%

Others5.9%

9,685

2,760

742 709244 100 28

0

2,000

4,000

6,000

8,000

10,000

TLS* Optus TPM Voda** MTU VOC*** NXT

A$m


17 September 2015 5

Fig 4 Macq estimates of IIN synergies (cumulative)

Fig 5 Breakdown of iiNet costs (FY15)



At a more granular level, the iiNet scheme documents highlight potential savings across the

following categories:

Moving iiNet traffic onto TPG’s domestic metro, regional and inter-capital fibre infrastructure;

Migrating off-net DSL customers on-net where the combined infrastructure footprint allows;

Using TPG’s voice network to serve iiNet voice customers;

TPG providing domestic and international IP services to iiNet;

Improved purchasing power given increased scale;

Removal of duplication in listed company expenses and back-office/corporate functions;

Leveraging increased marketing strength.

We note that as part of M2’s offer for iiNet it flagged $60m of annual synergies that could be

realised over a 3-year period. M2 also referenced a post-tax NPV of these synergies of $538m,

after implementation costs of $30m spread over 2-years. We are comfortable that the cost

synergies available to TPG would exceed those available to M2 given the greater network

infrastructure ownership at TPG.

In addition, we have assumed $10m in combined annual capex saving post the acquisition, but

note that TPG is likely to continue to invest in growth programs over time and any saving will be

difficult to isolate.

Synergies off-set dilution to EBITDA/sub, and drive FY16 earnings growth

iiNet currently generates $16.89 of EBITDA per broadband subscriber per month, which is 29.8%

below the $24.07 that TPG currently generates. As a result, the acquisition of iiNet will dilute the

overall EBITDA/sub at TPG, however we see this being partly offset by the capture of early-stage

synergies.

Overall, we expect that further synergies achieved in FY17 will see an increase in EBITDA/sub of

4.5% in that year to $22.61, however the dilutionary impact of the NBN and ongoing competition

will pressure this metric thereafter.

$18m

$32m

$42m$10m

$22m

$28m

$28m

$54m

$70m

0

10

20

30

40

50

60

70

80

FY16 FY17 FY18

$m

Operational cost synergies Network synergies

Network & carrier 63%

Hardware 5%

Labour 19%

Marketing 4%

Occupancy 3%

Corporate 5%

Other 1%


17 September 2015 6

Fig 6 TPG EBITDA per subscriber – waterfall: FY16

Fig 7 TPG EBITDA waterfall



NBN to drive margin compression over time

The NBN rollout is highly disruptive to all existing fixed line operators. Key operator risks include

the stranding of DSLAM infrastructure and backhaul, higher wholesale access charges, rising

customer retention and acquisition costs, and aggressive competition more broadly. The early

stage FTTP roll-out is also driving higher on-boarding charges, as evidenced in the financial

performance of Telstra and iiNet.

TPG is well positioned to navigate this challenge, as a low-cost operator with a sustainable cost

advantage over key competitors and significant scale following the iiNet transaction. Having said

that, our long-term forecasts assume reduced profitability per subscriber for NBN services over

time, and ultimately the broader TPG customer base. This reflects:

Higher wholesale costs (including CVC charges) and lower gross profit margins relative to

current on-net plans more than offsetting some margin expansion for off-net plans. Within this,

gross profit margins currently look most attractive for higher speed and higher data plans,

however we expect competitive impacts to neutralise these kinds of differences over time as

consumer preferences become more established;

Greater price-led competition as the rollout accelerates in recognition of the NBN as a

potential churn event; and

Potential for new entrants to enter the fixed line broadband space at low margins;

Overlaying this analysis is the implication that the synergies available from the iiNet acquisition will

be in part eroded over time. Most notably, the stranding of DSLAM infrastructure and backhaul

assets will impact profitability of iiNet subscribers. As a result, we see a near-term spike in

customer profitability, followed by a longer-term decline in per subscriber profitability and

Consumer margins.

24.07

16.89

20.29

1.35 21.64

0.00

5.00

10.00

15.00

20.00

25.00

TPG only iiNet only TPG/iiNetpre synergies

(pro-forma)

Synergies TPG

$

482.0

177.854.5

28.0742.2

0

200

400

600

800

FY15e EBITDA

iiNet (11 months)

Organic growth

Synergies FY16e EBITDA

$m


17 September 2015 7

Fig 8 TPG EBITDA per subscriber ($/month/SIO)

Fig 9 TPG Consumer broadband EBITDA profile



Dual-brand strategy, also creates some optionality

TPG has confirmed that it intends to continue to operate the iiNet brand and customer service

offering. This does create a dual-brand strategy for TPG Telecom, which allows it to continue to

target distinct market segments.

We have discussed in this note the implicit commoditisation of broadband offerings as the NBN

rollout gathers pace and the risk to all market participants of price competition that would follow

from this. In such an environment, a dual-brand strategy would have a more limited value to the

customer, and TPG could consider moving to a single Consumer brand in order to reduce costs in

this environment. This could unlock material synergies, incremental to those we have quantified in

this note.

Regulatory issues

FTTB network regulation

In 2013 TPG announced its intention to rollout a fibre-to-the-building (FTTB) network initially

spanning up to 500k premises/MDUs that existed within a 1km range of its existing network. The

rollout has been met with a number of regulatory interventions that will curtail the profitability of the

network, being:

A Carrier Licence Condition that caps wholesale pricing and requires functional separation of

the wholesale business;

A declaration inquiry that could lead to the service being regulated by the ACCC;

A further review that has the potential to impose a levy on metro lines to cross-subsidise the

unprofitable regional rollout.

Given the overhang of these market interventions, it seems unlikely to us that TPG will be

able to achieve abnormally high wholesale returns over time on its FTTB network

investment. Where it is likely to see a benefit is from increased retail share and scale on its

network, the sale of backhaul and other wholesale products to access seekers, increased depth to

its network which will increase its footprint and potentially create some optionality for additional

network products over time (including mobiles).

Functional separation already implemented. Structural separation a possibility.

In December 2014 the Government announced a new Carrier Licence Condition that requires

owners of fast broadband networks (25Mbps+) to residential customers:

To offer a 25/5Mbps wholesale bitstream service for no more than $27 per month and on a

non-discriminatory basis; and

18.66 19.30

20.12

21.63

23.14

21.64 22.61

21.81 21.17

20.54

10

12

14

16

18

20

22

24

26

28

30

FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e FY19e FY20e

EBITDA perSIO pm ($)

Dilution from IIN SIOs

offset by synergies and wholesale price cuts

Acceleration of NBN rollout

pressures profitability

Positive impact from merger

synergies

123 132153

184

218

454

519 527 537 547

0

100

200

300

400

500

600

FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e FY19e FY20e

$m


17 September 2015 8

To functionally separate their wholesale and retail businesses.

This applies to TPG with respect of its FTTB assets and requires it to have separate wholesale

and retail companies with separate directors, management, staff and operational support systems.

In response, TPG has set up the Wondercom brand and trading entity as the retailer of its FTTB

product. The Wondercom brand currently has a single product offering, which is unlimited high-

speed broadband (50-100Mbps downloads), local calls National Calls and 100 International calling

minutes for $69.99 per month.

Wondercom FTTB retail offering

Source: Company website, August 2015

In addition, the Government has flagged via its response to the Vertigan Review that structural

separation will become the default requirement for operators of high-speed broadband networks

from 1 January 2017, although the ACCC will be able to authorise functional separation.

Given the structure that TPG has undertaken – by separating its retail business for FTTB products

only rather than spinning out the network business (as has been the case with larger corporate

separations), the implementation and operational costs of compliance with this request are fairly

limited.

FTTB may become a declared service

Also of significance, the ACCC has commenced a declaration inquiry into whether a super-fast

broadband service, such as vectored VDSL, should be regulated under the Competition and

Consumer Act. Vectoring is used to reduce interference on copper pairs that are bundled within a

singular cable sheath.

TPG has opposed the declaration of this service. It currently uses an unvectored VDSL offering for

its FTTB product and argues that extensive infrastructure based competition can and does exist to

this product.

If the service were to be declared, it is possible that the wholesale profitability of FTTB services

will be limited to a regulated return. This process is ongoing.

Regional review and potential for levy on FTTB

In addition to the implementation of functional or structural network separation, the Government is

considering the implementation of measures that could see high-speed broadband network

providers provide a transparent cross-subsidy to the NBN’s unprofitable fixed wireless and satellite

offerings. Under one scenario being considered, this would take the form of a levy that would be

applicable to NBN Co itself, as well as TPG’s FTTB service.

Such a levy would impact the profitability of TPG’s FTTB rollout. For example, if the requirement to

offer a 25/5 Mbps wholesale bitstream service was retained, while a levy of, say $15/line/month

was applied to these lines, the net wholesale revenue to TPG on such a line would drop from

$27/month to $12/month.


17 September 2015 9

Even with such a levy in place, TPG’s FTTB rollout could still be profitable to a number of

locations and TPG would likely continue to offer FTTB wholesale services. However, given the

financial returns do deteriorate in this situation, the natural implication of such a policy is that the

number of premises that TPG can generate sufficient returns from will reduce. Hence, the rollout

target could feasibly reduce with regard to premises that are ultimately passed.

Key issues that would need to be clarified as the process evolves include the amount of cross-

subsidy required for unprofitable services, and the structure of any cross-subsidy. Different models

would see a flat levy imposed or a tiered approach to recognise the different economics for

different types of buildings.

Impact from ACCC Fixed Line Review

On 29 June the ACCC released a further draft pricing paper as part of its Fixed Line Services

review. Within it, the ACCC proposed a 9.6% reduction in fixed-line (copper) inputs across the

board, compared to an earlier draft that would have seen regulated prices fall by just 0.7%. If

confirmed, the new pricing will apply from 1 October 2015 to 30 June 2019.

As these copper inputs currently represent the vast majority of TPG’s network access costs, any

cuts will have a direct positive impact on profitability. On our estimates, the impact to TPG as a

stand-alone business (ie- without the iiNet acquisition) was around $13m in EBITDA on a pro-

forma basis prior to any retail pass-through. Including the iiNet assets, which has significant

wholesale input costs for on-net and off-net services, this benefit increases to $39m or 8.2% to

pro-forma consolidated FY16 EPS (again, this is before any retail pass-through).

This opex/EBITDA impact is summarised in Fig 10 below (before any retail pass-through).

Fig 10 EBITDA impact of a 9.60% price reduction (before any retail pass-through)

FY16 FY16 FY16

TPG iiNet (pf) Total

Services (k, average) LSS 159 357 515 ULLS 571 275 846 WADSL 56 271 326 WLR 0 485 485 Total 785 1388 2173 Change in pricing ($/line/month) LSS (0.17) (0.17) (0.17) ULLS (1.56) (1.56) (1.56) WADSL (2.35) (2.35) (2.35) WLR (2.19) (2.19) (2.19) Access cost saving ($m pa, pro-forma) LSS 0.32 0.73 1.05 ULLS 10.69 5.15 15.84 WADSL 1.57 7.64 9.20 WLR - 12.75 12.75 Total 12.58 26.26 38.84

TPG subscribers in FY16 are based on an average of FY15 and FY16 estimates. iiNet subscribers in FY16 are based on closing numbers of FY15 and assume no change during FY16. Source: Macquarie Research, September 2015

Ultimately, the NBN rollout will reduce the number of regulated copper access lines significantly

over the coming years as these access products are removed in favour of the NBN products. This

dynamic means that the benefit to TPG is diluted over time as the NBN rollout gathers pace.

A key component of any analysis is the assumption of pass-through of any savings to retail

customers. The numbers above highlight the gross opex savings and hence assumes there is no

pass through. In the short term, we would see this as a likely outcome, but note that ongoing

competitive dynamics in the fixed line markets point to ongoing pressure on ARPUs, some of

which might be accelerated by this competition.


17 September 2015 10

Strong cash flow to reduce debt burden in coming years

TPG is a highly cash generative business. Like many of its peers, it releases working capital as it

grows, leading to cash conversion rates in excess of 100%.

Fig 11 TPM cash conversion has typically exceeded 100% due to favourable working capital dynamics

$m FY12 FY13 FY14 1H15a 2H15e FY15e FY16e FY17e FY18e

Operating cash flow 214.6 232.8 293.0 187.1 192.5 379.6 489.4 596.8 626.1 Add: Tax Paid 47.7 79.2 96.1 43.7 48.7 92.4 117.4 160.5 171.2 Add: Interest Paid 14.8 6.0 7.5 7.3 8.4 15.8 86.7 80.3 64.9 Ungeared, pre-tax cashflow 277.2 318.0 396.6 238.1 249.7 487.7 693.5 837.5 862.3 EBITDA 261.4 293.1 363.7 236.2 245.8 482.0 682.2 825.9 852.7 EBITDA cash conversion 106.0% 108.5% 109.1% 100.8% 101.6% 101.2% 101.7% 101.4% 101.1%


The company has historically applied this cash to reducing debt, and ultimately creating capacity

for acquisitions over time. iiNet is the third major acquisition for TPG, following on from the

purchases of Pipe Networks in FY10 and AAPT in FY14. This is illustrated in Fig 12 below.

We see TPG returning its focus to the reduction in gearing levels post the transaction. On our

estimates, TPG can return the business to below 1.0x net debt/EBITDA in 3.5 years and,

assuming no other M&A is conducted, to a net cash position by FY21. This assumes a 40%

dividend payout of adjusted EPS by the company.

History would suggest that once TPG has returned its gearing to below 1.0x ND/EBITDA, it will

return its focus to new M&A targets.

Fig 12 TPG net debt ($m)

Fig 13 TPG net debt/EBITDA



Under TPG’s infrastructure model, capex spend is heavily skewed to direct network investment

and the purchase of network capacity via indefeasible rights of use (IRUs). We assume that TPG

redeploys most of the iiNet capex to core fibre investment (including FTTB) and capex savings

post the transaction are modest at ~$10m per annum.

50

305

216

131

13

323288

1,589

1,326

1,026

0

200

400

600

800

1,000

1,200

1,400

1,600

FY09 FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e

$m

PIPE Networks

acquisition

AAPT acquisition

Acquisition of iiNet and

stake in AMM/VOC

0.5x

1.7x

0.9x

0.5x

0.0x

0.9x

0.6x

2.1x

1.6x

1.2x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

FY09 FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e



Fig 14 TPG FCFEps vs DPS

Fig 15 TPG capex profile, including IRU payments


*AAPT included in “Underlying” from FY17 on. IIN included in “Underlying” from FY18 on.


12 month target price set at $10.40/sh

We use our DCF analysis as our primary valuation methodology. Our current DCF stands at

$9.53/sh, and a 12 month roll forward implies a valuation of $10.37/sh. The latter informs our 12-

month target price of $10.40/sh.

There are a number of key valuation drivers and events that underpin this analysis. These include

assumptions over the long-term profitability of fixed line subscriber numbers, TPG’s share, growth

in its Corporate division, ACCC fixed line pricing outcomes, synergies achieved from the iiNet

transaction, and DCF inputs. The sensitivity to these assumptions is summarised in Fig 16.

Fig 16 TPM valuation sensitivity analysis

Sensitivity Base assumption

Change Valuation impact

Impact (%)

Fixed line price review No change -9.6%; 50% pass through +12cps +1.1% Fixed line price review No change -9.6%; 100% pass through +23cps +2.2% Synergies (realised in FY16) $70m +$10m +12cps +1.2% Long-term BB EBITDA/sub $18.00 +$2.50/sub +81cps +7.9% Long-term BB market share 30% +1% +24cps +2.3%

Source: Macquarie Research, September 2015

TPG does appear fully priced when compared to the rest of the sector on most multiple

comparisons, which we think is explained and justified by a number of factors:

TPG’s earnings growth prospects exceed those of its peer group;

TPG has a track-record of exceeding market earnings expectations;

Prospects of increased profitability should the ACCC reduce copper access pricing;

Potential for synergies to exceed the $70m assumed in our base earnings case;

Likely strong near-term earnings momentum to be over-played relative to some of the longer-

term earnings pressures from the NBN.

28.2 29.633.5

49.4

56.2

64.5

70.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY14 FY15e FY16e FY17e FY18e FY19e FY20e

FCFE p/s DPS

cps

50 58 5976

108 112 11514

9

30

2010

35

35

15

8

26

2513 10 8

40

48 46

16 12

37

30

69

145

217

193

167

138 135

0

50

100

150

200

FY14 FY15e FY16e FY17e FY18e FY19e FY20e

Underlying Spectrum AAPT* FTTB TPM IRUs IIN IRUs iiNet*

A$m



Fig 17 Macquarie A/NZ Telecoms comparables

Currency Share Macq Market EV EV/EBITDA EV/EBIT PER Net Debt /

Price Recc. Cap ($m) ($m) FY16 FY17 FY16 FY17 FY16 FY17 EBITDA

Telstra Corporation AUD $5.48 UP 66,996 81,234 7.5x 7.5x 12.1x 11.9x 16.8x 16.6x 1.3x SingTel SGD $3.69 OP 58,843 68,122 13.5x 12.7x 14.1x 12.6x 15.1x 13.4x 1.9x TPG Telecom* AUD $9.39 OP 7,906 7,988 12.5x 10.9x 16.7x 14.2x 23.1x 19.5x 2.1x Spark New Zealand NZD $3.26 N 5,888 6,577 6.7x 6.7x 11.9x 11.6x 15.6x 15.3x 0.7x M2 Group*^ AUD $8.50 OP 1,559 2,036 8.7x 7.7x 12.6x 10.7x 12.8x 11.3x 2.7x Vocus^ AUD $6.21 n/a 1,436 1,625 12.2x 9.7x 17.1x 13.0x 24.1x 18.3x 1.9x Chorus NZD $2.67 OP 1,056 2,639 4.7x 4.5x 11.2x 10.6x 13.8x 10.5x 2.9x Speedcast^ AUD $4.06 OP 487 568 11.8x 10.6x 19.7x 18.3x 27.3x 25.7x 2.3x NextDC^ AUD $2.26 OP 438 452 24.4x 13.8x 42.2x 15.3x 140.1x 31.2x 8.5x Average** 9.3x 9.3x 14.4x 13.1x 18.6x 18.0x 2.7x Median 8.7x 9.7x 13.3x 12.6x 16.2x 16.6x 2.1x

Note: *TPM and MTU have been adjusted to exclude customer base amortisation. **NXT multiples have been excluded from FY16 calculations as they are outliers. Prices at 15 September 2015. ^M2, NextDC covered by Michael Higgins; Speedcast covered by Andrew Wackett. Source: Factset, Macquarie Research, September 2015

Similarly, looking at TPG from a PER view against ASX100 industrial peer companies, it looks fully

priced. However, given the factors above we believe the stock can sustain a premium should it

continue to deliver strong growth prospects, and given a number of stock-specific factors (iiNet

synergy potential, ACCC decision) could deliver higher than expected growth.

Fig 18 ASX100 (ex Banks, Resources): PER (FY1) vs EPS CAGR (FY1-3)

Note: Sample also excludes SKI as PER (FY1) was an outlier. TPG data excludes PPA amortisation. Data at market close on 15 September 2015. Source: Macquarie Research, September 2015

TPG

(10%)

0%

10%

20%

30%

40%

0x 10x 20x 30x 40x 50x 60x 70x 80x

EPS CAGR (FY1-3)

PER (FY1)



Fig 19 Zooming in - Subset of ASX100 (ex Banks, Resources): PER (FY1) vs EPS CAGR (FY1-3)

Note: Sample also excludes SKI as PER (FY1) was an outlier. TPG data excludes PPA amortisation. Data at market close on 15 September 2015. Source: Macquarie Research, September 2015

TPG Corporate history

TPG was founded in 1986 as a computer retailer. Almost 30 years on, it has a market

capitalisation of over $7.5bn and is the second largest fixed line telecoms operator in Australia.

Fig 20 TPG Telecom corporate history

Date Event Price paid (Multiple)

Notes

1986 TPG founded as Total Peripherals Group by David Teoh

n/a Founded as a computer retailer and later transitioned to internet and telephone services.

April 2007 TPG acquired 70.25% stake in Chariot Limited (ISP)

$4.5m Acquired Adelaide-based ISP.

April 2008 TPG completes reverse takeover of SP Telemedia

$230m (4.7x FY08 EV/EBITDA and 8.5x FY08 PER)

Combined TPG's 200k subscribers with SP's 500k subscribers (included key corporate and government customers). Created one of Australia's largest DSLAM networks (TPG added 238). Also combined TPG's and SP's backhaul. SP had over 320 network access points and data collection centres in 66 call collection areas, as well as advanced IP carrier backbone.

August 2008 Acquired remaining 29.75% of Chariot Limited (ISP)

$2.7m Took full ownership of Chariot.

December 2009 SP Telemedia renamed TPG Telecom Limited

n/a Followed reverse takeover

March 2010

Acquisition of PIPE Networks (Domestic and International transmission)

$373m (10.1x FY10 EBITDA)

Acquired a large fibre network through Sydney, Melbourne and Brisbane, access to 500+ buildings, 200+ Telstra exchanges and 75+ major data centres, a diversified customer base, international capacity and submarine cable (PPC-1).

August 2011 Acquisition of IntraPower (Trusted Cloud Platform)

$13m (39x FY10 PER)

Provides secure "IT-as-a-service" and enabled on-demand network access to a shared pool of computing resources, accessible from any location.

February 2014 Acquisition of AAPT (Corporate/Wholesale)

$450m (6.4x EV/EBITDA pre synergies)

Incorporated AAPT's intercapital fibre network into TPG's CBD, metro and international network assets. AAPT added 11,000km of fibre across six states/territories, fibre access to over 50% of NBN POIs and 1,500 commercial buildings, 15 data centres and coverage to over 950k metro businesses.

August 2015 Acquisition of iiNet (Consumer Broadband and Fixed Voice)

$1.9bn (~10x CY14 EV/EBITDA)

Increased fixed broadband share from 12% to 26%. Increased scale, geographical diversification (iiNet brought West coast customers) and expanded corporate division (iiNet brought large SME base)

Source: Macquarie Research, September 2015

REAGNC

MFG

CSL

JHX

TWE

BXB

REC COH

RMD

HSO

RHC

SEK

TPG

CAR

MPL

AIO

WFD

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

18x 20x 22x 24x 26x 28x

EPS CAGR (FY1-3)

PER (FY1)



Fig 21 Available NBN plans (download/upload speed of 12/1 mbps)


Note: Available 24 month NBN plans (bundled with home phone line) as at 16 Sep 2015. Most plans include unlimited local and national calls (except for Dodo plans, which are PAYG). Some phone inclusions vary across operators. Any one-off or set up fees have been amortised over 24 months and are included in the monthly cost. Source: Company data, Macquarie Research, September 2015




$30

$40

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$60

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$100

0 200 400 600 800 1,000 1,200

Monthly cost

TPG iiNet Dodo

Unltd

Monthly data (GB)

$40

$60

$80

$100

$120

$140

$160

0 500 1,000 1,500 2,000 2,500

Monthly cost

Optus TPG iiNet Dodo Telstra

Unltd

Monthly data (GB)

$60

$80

$100

$120

$140

0 500 1,000 1,500 2,000 2,500

Monthly cost

Optus TPG iiNet Dodo

Unltd

Monthly data (GB)




TPG Telecom (TPM) $9.70Interim 1H15 2H15e 1H16e 2H16e Full year FY14 FY15e FY16e FY17e

Revenue $m 627.3 618.0 1,010.0 1,066.8 Revenue $m 969.2 1,245.3 2,076.8 2,247.3

Opex $m 391.1 372.2 647.1 687.6 Opex $m 604.5 763.3 1,334.7 1,421.4

EBITDA $m 236.2 245.8 362.9 379.2 EBITDA $m 364.7 482.0 742.1 825.9

Depreciation $m 51.4 56.6 70.2 83.8 Depreciation $m 72.6 108.1 154.1 156.8

Amortisation (ex PPA amort) $m 5.9 5.4 16.1 18.3 Amortisation (ex PPA amort) $m 7.7 11.3 34.4 35.5

D&A $m 57.3 62.1 86.4 102.1 D&A $m 80.2 119.4 188.5 192.3

EBIT $m 178.9 183.7 276.6 277.1 EBIT $m 284.4 362.6 553.7 633.6

Associates $m 0.0 0.0 0.0 0.0 Associates $m 0.0 0.0 0.0 0.0

EBIT incl. assoc $m 178.9 183.7 276.6 277.1 EBIT incl. assoc $m 284.4 362.6 553.7 633.6

Net Interest Expense $m 8.9 8.4 39.2 47.5 Net Interest Expense $m 9.1 17.4 86.7 80.3

Pre-Tax Profit $m 170.0 175.2 237.4 229.6 Pre-Tax Profit $m 275.3 345.3 467.0 553.3

Tax Expense $m 50.8 49.6 68.8 66.6 Tax Expense $m 83.7 100.4 135.4 160.5

Net Profit $m 119.2 125.6 168.5 163.0 Net Profit $m 191.6 244.8 331.6 392.8

Minority Interests $m 0.0 0.0 0.0 0.0 Minority Interests $m 0.0 0.0 0.0 0.0

Adjusted Earnings $m 119.2 125.6 168.5 163.0 Adjusted Earnings $m 191.6 244.8 331.6 392.8

PPA amortisation (net of tax) $m 12.5 9.5 5.5 5.5 PPA amortisation (net of tax) $m 19.3 22.0 11.1 4.6

NRIs (net of tax) $m 0.0 0.0 -42.0 0.0 NRIs (net of tax) $m -0.7 0.0 -42.0 0.0

Reported Earnings $m 106.7 116.1 121.0 157.5 Reported Earnings $m 171.7 222.8 278.5 388.3

EPS (reported) cps 13.4 14.6 14.9 19.3 EPS (reported) cps 21.6 28.1 34.2 47.5

EPS (adj) cps 15.0 15.8 20.7 20.0 EPS (adj) cps 24.1 30.8 40.7 48.1

EPS (adj) grow th) % 29.8% 25.9% 38.0% 26.1% EPS (adj) grow th) % 35.5% 27.7% 31.9% 18.2%

PER (reported) x 36.1 33.2 32.6 25.2 PER (reported) x 44.9 34.6 28.4 20.4

PER (adj) x 32.3 30.6 23.4 24.3 PER (adj) x 40.2 31.5 23.8 20.2

DPS cps 5.5 6.3 8.3 8.0 DPS cps 9.3 11.8 16.3 19.2

Dividend yield % 0.6% 0.7% 0.9% 0.8% Dividend yield % 1.0% 1.2% 1.7% 2.0%

Payout ratio (adj) % 36.6% 43.2% 40.0% 41.4% Payout ratio (adj) % 38.3% 38.3% 40.0% 40.0%

FCF/sh cps 13.0 17.0 13.0 21.0 FCF/sh cps 28.2 30.0 34.0 49.6

FCFE yield (annualised) % 2.7% 3.5% 2.7% 4.3% FCFE yield (annualised) % 2.9% 3.1% 3.5% 5.1%

EBITDA margin % 37.7% 39.8% 35.9% 35.5% EBITDA margin % 37.6% 38.7% 35.7% 36.7%

EBIT margin % 28.5% 29.7% 27.4% 26.0% EBIT margin % 29.3% 29.1% 26.7% 28.2%

EBITDA grow th % 47.0% 20.5% 53.6% 54.3% EBITDA grow th % 29.3% 32.2% 54.0% 11.3%

EBIT grow th % 34.5% 21.4% 54.6% 50.9% EBIT grow th % 36.6% 27.5% 52.7% 14.4%

Key assumptions 1H15 2H15e 1H16e 2H16e Key assumptions FY14 FY15e FY16e FY17e

Total broadband subscribers 000s 786.0 817.0 1,820.0 1,865.5 Total broadband subscribers 000s 748.0 817.0 1,865.5 1,962.7

Implied broadband market share % 11.9% 12.1% 26.3% 26.3% Implied broadband market share % 11.6% 12.1% 26.3% 27.0%

ARPU: On-Net (LSS) $ 42.3 42.2 48.3 49.5 ARPU: On-Net (LSS) $ 42.5 42.2 48.9 48.6

ARPU: On-Net (ULL) $ 59.5 59.7 60.6 60.8 ARPU: On-Net (ULL) $ 59.4 59.6 60.7 57.9

Profit and Loss Ratios FY14 FY15e FY16e FY17e Cashflow Analysis FY14 FY15e FY16e FY17e

Revenue grow th % 33.8% 28.5% 66.8% 8.2% EBITDA $m 364.7 482.0 742.1 825.9

EBITDA grow th % 29.3% 32.2% 54.0% 11.3% Ch in Working Capital $m 33.0 5.6 9.6 9.9

% of EBITDA in 1H % 44.1% 49.0% 48.9% 50.2% Net Interest Paid $m 7.5 15.8 86.7 80.3

Effective Tax Rate % 33.8% 32.0% 30.0% 29.3% Tax Paid $m 96.1 89.2 112.7 158.5

EV/EBIT x 31.2 24.1 17.7 14.7 Other $m (1.0) 0.2 (58.3) 1.8

EV/EBITDA x 22.0 16.6 12.8 11.2 Operating Cashflow $m 293.0 382.7 494.1 598.7

EV/Sales x 8.3 6.4 4.6 4.1 Acquisitions $m 466.5 120.7 1,712.1 -

Capex $m 68.9 144.9 216.6 193.4

Balance Sheet Ratios FY14 FY15e FY16e FY17e Asset Sales $m - - - -

Other $m 2.6 3.5 3.5 3.5

ROE % 22.2% 24.6% 23.5% 25.6% Investing Cashflow $m (532.8) (262.2) (1,925.2) (189.9)

ROFE % 22.2% 26.2% 18.1% 21.2% Dividends Paid $m 67.5 81.4 117.6 143.8

ROA % 16.6% 12.8% 30.3% 35.1% Equity movements $m - - 251.2 -

Net Debt $m 323.3 285.0 1,582.4 1,317.3 Debt movements $m 308.0 (27.3) 1,298.4 (265.0)

Net Debt/Equity x 9.6 8.1 6.8 5.6 Other $m (2.6) - - -

Net Debt/EBITDA x 0.9 0.6 2.1 1.6 Financing Cashflow $m 237.9 (108.7) 1,432.1 (408.8)

Interest Cover (EBIT) x 28.2 19.1 5.5 7.8

EFPOWA m 793.8 793.8 815.1 817.0 Net Cashflow $m (1.8) 11.9 1.0 -

Divisional estimates FY14 FY15e FY16e FY17e Balance Sheet FY14 FY15e FY16e FY17e

Broadband $m 478.4 535.1 1,331.0 1,464.3 Cash $m 23.8 36.1 37.1 37.1

Mobile $m 79.1 84.3 95.0 106.1 Receivables $m 93.3 100.5 313.5 331.7

Corporate $m 406.0 620.0 644.8 670.6 Inventories $m 2.7 3.0 5.1 5.4

Other $m 5.7 5.9 6.0 6.2 Investments $m 106.5 239.6 1,945.1 1,938.5

Total revenue $m 969.2 1,245.3 2,076.8 2,247.3 PP&E $m 553.8 574.1 636.6 673.2

Broadband $m 183.8 217.8 453.8 519.2 Intangibles $m 712.3 682.7 632.5 590.4

Mobile $m 16.7 17.8 20.1 22.4 Other Assets $m 16.9 18.7 28.1 30.5

Corporate $m 160.2 242.2 264.0 279.9 Total Assets $m 1,509.3 1,654.7 3,598.0 3,606.9

Other $m 4.0 4.1 4.2 4.4 Payables $m 136.6 147.2 235.0 248.7

Total EBITDA $m 364.7 482.0 742.1 825.9 Short Term Debt $m 0.2 0.2 0.2 -

Long Term Debt $m 346.8 320.9 1,619.3 1,354.5

Snapshot Current Provisions $m 34.6 37.3 64.3 68.1

Current price $ 9.70 Other Liabilities $m 158.7 168.6 286.5 298.6

EFPOWA # 793.8 Total Liabilities $m 676.9 674.2 2,205.4 1,969.8

Market cap $m 7,699.9 Shareholders Funds $m 832.4 980.4 1,392.6 1,637.1

Net debt $m 285.0 Minority Interests $m - - - -

EV $m 7,984.9 Shaereholder Equity $m 832.4 980.4 1,392.6 1,637.1



Macquarie Quant View

The quant model currently holds a strong positive view on TPG Telecom.

The strongest style exposure is Price Momentum, indicating this stock has

had strong medium to long term returns which often persist into the future.

The weakest style exposure is Valuations, indicating this stock is over-

priced in the market relative to its peers.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Telecommunication

Services)

17/170 Global rank in

Telecommunication Services

% of BUY recommendations 33% (3/9)

Number of Price Target downgrades 1

Number of Price Target upgrades 4

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

0.8

1.0

1.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Telstra Corporation

M2 Group

TPG Telecom

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Telstra Corporation

M2 Group

TPG Telecom

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.1

0.0

0.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Telstra Corporation

M2 Group

TPG Telecom

-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%

Telstra Corporation

M2 Group

TPG Telecom

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-30%

-29%

-24%

-24%

23%

24%

29%

33%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

SAL Growth 5yr Historic

Capex Growth

Change in PPE FY0

Asset Growth

Dividend Cover

PE Growth FY1

Net Buybacks to Mkt Cap

Profit Margin Last Actual…

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.65-0.04

-1.29-0.06

0.18 1.22

0.07 0.58 0.16

-0.28 1.19

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/170)

0 50 100

Percentile relative

to market(/411)



Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2015

AU/NZ Asia RSA USA CA EUR

Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients)

Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients)

Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients)

TPM AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, September 2015

12-month target price methodology

TPM AU: A$10.40 based on a DCF methodology

Company-specific disclosures: TPM AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided TPG Telecom Ltd with investment advisory services in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 23-Sep-2014 TPM AU Outperform A$7.60 26-Mar-2014 TPM AU Outperform A$7.00 18-Sep-2013 TPM AU Neutral A$4.00 19-Mar-2013 TPM AU Outperform A$2.70 18-Sep-2012 TPM AU Outperform A$2.15

Target price risk disclosures: TPM AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited



(ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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TPG Telecom - Macquarie · We resume coverage on TPG Telecom with an Outperform recommendation and a $10.40/sh target price. TPG is a cost-efficient and scaled fixed line telecoms