The TPG Telecom Ltd (ASX: TPG) share price is on watch after announcing its FY20 half year result after merging.
Quick background
This is the first result that TPG is reporting after the merger between the old TPG and Vodafone Hutchison Australia (VHA). The old TPG has stopped trading on the ASX and is now called TPG Corporation. The old VHA changed its name to TPG Telecom Limited and ‘acquired’ the old TPG. For accounting purposes, the merger was completed on 26 June 2020.
Today’s result is for a full six months of the old VHA, plus four days of the original TPG.
The old TPG’s assets and liabilities have been consolidated into the combined balance sheet at 30 June 2020. However, significant pre-merger implementation restructuring steps occurred between 2 July 2020 and 13 July 2020. So the balance sheet at 30 June 2020 isn’t fully reflective of the situation after the merger was implemented. TPG Singapore was demerged (now called Tuas Limited (ASX: TUA)), TPG Corporation paid a special dividend of $479 million and (the new) TPG Telecom undertook a debt restructuring to remove $4.475 million of debt from the business.
HY20 result
So, it’s fair to say that this result is messy. The second six months of the financial year will be reflective of the company’s performance.
The combined business reported revenue of $1.54 billion, down around $200 million. The reported EBITDA (click here to learn what EBITDA means) fell by $52 million to $531 million, whilst the underlying EBITDA dropped by 6.25% to $555 million.
TPG Telecom reported a net profit after tax (NPAT) of $83 million. However, this was largely due to a $226 million one-off income tax credit. The underlying bottom line improved by $31 million to a net loss of $113 million.
TPG said that whilst the telecommunication sector is proving to be more resilient than some other sectors during the COVID-19 pandemic because of customer reliance on the internet, TPG Telecom still reported a negative impact of COVID-19 on the mobile sector.
Global travel restrictions had a significant impact on revenue and EBITDA, causing an 80% reduction in roaming margin, a 30% decline in prepaid connections and a 20% decrease in post-paid connections.
TPG’s call centre was also impacted during March and April when lockdown restrictions were hurting the call centre in India. Operations are now back to almost full capacity, though higher costs are being incurred due to changes in service delivery.
About one third of retail stores were temporarily closed between April and JUne due to the shut down and precautionary measures, also impact sales.
The company gave several extra data, free texts and a low cost plan for people in hardship. Late payment fees and collection activities were also paused in the June quarter.
During the year the company lost 5% of its mobile subscribers, ending with 5.46 million, however its nbn customer base rose by 32% to 150,000.
TPG Corporation
For the old TPG business, for the 11 months to 30 June 2020 it reported that its actual EBITDA (on a guidance basis) was $720 million. For the six months to 30 June 2020, the EBITDA was $391 million, down from $407 million in the prior corresponding period.
It did fairly well during the lockdowns, however the decline in economic activity could lead to business closures and affect corporate division revenue in future periods. There could also be increased bad debts.
Summary
5G is important part of the company’s future and TPG is relying on merger synergies to justify the combination of the two telcos. It is working on those synergies and to be more efficient, though COVID-19 continues to provide challenging circumstances.
Not a terrible result, but I’d rather invest in something like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which offers exposure to TPG but also has diversification to other businesses. There are several other ASX dividend shares which may be more defensive with more growth potential.
