What-if TPM wins 7-8% market share in its new Singapore mobiles business?

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1 March 23, :00 PM GMT TPG Telecom Ltd What-if TPM wins 7-8% market share in its new Singapore mobiles business? Stock Rating Overweight Industry View In-Line Price Target A$10.00 In an increasingly competitive Australian telco and broadband market, TPM exhibits best practice in terms of cost-out from acquisitions (iinet) as well as growing its new businesses (Corporate, FTTB). Risks remain high, but we think adequately priced-in on P/E of 13x F2018E and PEG ratio of 1.3x. WHAT'S CHANGED TPG Telecom Ltd From To Price Target A$10.75 A$10.00 One of the features of TPM's 1H results was the better than expected cost-out from its iinet acquisition. When the deal was announced in 2015, the initial costout target was A$40m 18 months later and TPM has delivered shareholders a higher ~A$80m EBITDA lift. Focus on costs and efficiency is part of the TPM culture. In this report we have a closer look at the company's announced move into the Singapore mobiles market. Investor's reaction has not surprisingly been sceptical. The market is competitive and Australian companies diversifying internationally have a mixed track record. But in TPM's case, we think this is familiar territory. History says it likes being a disruptor, is savvy in offering consumers deep value and is familiar tackling larger incumbent telco players with a technology edge; a newer, leaner cost structure and most importantly, no legacy profit pools to protect. It is a non-consensus view, and comes with higher risk, but we believe TPM can be successful in Singapore - see pages What do we factor in? we assume a Sep 2018 launch and forecast TPM's share of total mobile subs to be 2.8% F19, 4.4% F20, 5.9% F21 and 6.8% F22. This equates to k or 11-13% share of post-paid subs by F22... the growth trajectory we have applied is based on other global mobile disruptors e.g. Wind (Italy), Softbank (Japan), Orange (Spain), T-Mobile (US), Illiad (France). We assume TPM prices at a ~30% discount to peers. By year 4 we forecast EBITDA A$36-56m (S$39-61m) at a 15-20% margin. If this can be achieved, our ROIC forecast is 8% in F22. Not as high as TPM's core Australian business, but not bad. We include Singapore in our SoTP at book value ~A$300m or 36c/share at F18. Separate to the above discussion, TPM's 1H results were slightly ahead of expectations & full year guidance reiterated. We reduce F17-19E EPS by 0-12%. MORGAN STANLEY AUSTRALIA LIMITED+ Andrew McLeod EQUITY ANALYST Andrew.Mcleod@morganstanley.com Elise Lansky RESEARCH ASSOCIATE Elise.Lansky@morganstanley.com Joseph Michael RESEARCH ASSOCIATE Joseph.Michael@morganstanley.com MORGAN STANLEY ASIA (SINGAPORE) PTE.+ Mark Goodridge, CFA EQUITY ANALYST Mark.Goodridge@morganstanley.com Alvin Lim, CFA, CMT RESEARCH ASSOCIATE Alvin.Lim@morganstanley.com Morgan Stanley appreciates your support in the 2017 Institutional Investor s All-Asia Research Team Survey. Request your ballot TPG Telecom Ltd ( TPM.AX, TPM AU ) Australia Telecoms / Australia Stock Rating Overweight Industry View In-Line Price target A$10.00 Up/downside to price target (%) 43 Shr price, close (Mar 21, 2017) A$ Week Range A$ Sh out, dil, curr (mn) 838 Mkt cap, curr (mn) A$5,850 EV, curr (mn) A$7,271 Avg daily trading value (mn) A$19 Fiscal Year Ending 07/16 07/17e 07/18e 07/19e ModelWare EPS (A$) Prior ModelWare EPS (A$) Consensus EPS (A$) Revenue, net (A$ mn) 2,388 2,545 2,704 3,027 EBITDA (A$ mn) ModelWare net inc (A$ mn) P/E Div yld (%) Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-u.s. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 1

2 Financial Summary Exhibit 1: TPM: Financial Summary Source: Company Data, Morgan Stanley Research. E = Morgan Stanley Research estimates 2

3 Risk Reward Vertical integration + market share to drive earnings Source: Thomson Reuters, Morgan Stanley Research estimates Price Target A$10.00 We derive our price target from our base case. Bull A$ x bull case F2018E EPS of 60c Strong economic recovery + corporate market share wins + corporate deal closes + NBN EBITDA margins of 35%: Strong real GDP growth in F2017 and F2018 supports consumer confidence, allowing price increases and EBITDA margin expansion. TPM to expand its retail and corporate market share +2ppt above our expectations in F2017-F19E. TPM s new FTTB network benefits from high customer take-up and sustainably higher profit margins for TPM. Base A$ x base case F2018E EPS of 48c Modest economic recovery: Moderate real GDP growth in F2017 and F2018 supports consumer confidence for price increases and margin expansion. We assume 1ppt market share gains per annum for TPM consumer broadband business. Bear A$ x bear case F2018E EPS of 36c Economic weakness + negative competitor actions have greater impact on TPM: Real GDP declines in F2017 and F2018, resulting in poor consumer confidence and price decreases, leading to lower new customer gains and revenues. In addition, the competitive landscape is more intense than expected in an NBN environment, which leads to a much larger EBITDA margin contraction. Why Overweight? We expect the stock to outperform its Australian & New Zealand telco peers on a 12- month view. We believe TPM s Fibre-to-the-Building (FTTB) network will give it a significant competitive cost advantage, which should lift EBITDA margins over time and gain additional market share. Balance sheet flexibility is available to bring shareholders potential accretive acquisitions or new investment opportunities. Key Value Drivers Broadband market share growth: All else equal, +/-1ppt in broadband market share growth means +/-5% change in EPS. EBITDA margin expansion: All else equal, +/-1ppt EBITDA margin expansion means +/- 7% change in EPS. Risks to Achieving Price Target Downside: TPM is unable to hold on to the cost reductions in an NBN world because the pricing environment becomes irrational. TPM s low-cost strategy fosters perceptions of low customer service, and this leads to market share losses. TPM s proposed FTTB network does not proceed because of unexpected regulatory intervention. TPM could make a substantial, dilutive and/or strategically flawed acquisition or investment. For example, the company is exploring the potential to start up an Australian mobile telephony business. If this were to proceed, we would need to examine the ROIC and risk-adjusted returns achievable. 3

4 Investment Thesis... Why we are Overweight TPM shares The 1H F2017 results were consistent with our positive thesis the Australian telco market is increasingly competitive and we forecast industry-wide returns to remain under downward pressure. But, against this backdrop, TPM is continuing to achieve subscriber growth, earnings growth and attractive returns. Cost-out/synergies on recent acquisitions such as iinet are central to this but TPM is not just a cost-out story, revenue gains from new and growing businesses are also commendable, we view the opportunities in TPM Corporate and its FTTB network as key drivers of medium term growth. In this report, we factor in higher near term capex for the Singapore mobile investment for the first time; as a result we have lowered our near term earnings estimates (EPS by 0% to -12% F E. We have modestly reduced our PT to A$10.00 (was A$10.75). We are Overweight for three reasons: 1) TPM's consumer broadband business is still growing. Yes, the ~40% EBITDA margins on the traditional TPG portfolio are unsustainable in an NBN world but, offsetting this: i) TPM is lifting margins from the acquired iinet portfolio (up from 26% to 29% this result); and ii) TPM is adding altogether new broadband customers in regional Australia as the NBN is rolled out. Net/net we forecast EBITDA CAGR 5% next 3 years and our standalone DCF value is A$6bn or ~A$7/share vs. current share price A$ ) On top of that, we think TPM Corporate & FTTB network upside are both underappreciated & will drive medium term growth. The 1H results highlight gains being achieved by its Corporate division. Revenue growth of +3.8% accelerated vs. +2% last year. We estimate TPM+AAPT+IIN have only ~9% market share of the corporate market, and we forecast this to grow to 11% in three years. We estimate every +/-1ppt in share gain represents +/-A$90m in revenue, A$30m in EBITDA and NPV = A$0.26/share. 3) Valuation attractive P/E ~13x F2018 with PEG ratio of 1.3x. Shares have fallen ~50% from peak A$12.32 (May 2016) and now reflect only a ~13x F2018E P/E multiple (peak was 28x). We think risk/return is attractive over the next 3 years, F2017E-20E EPS CAGR of 10%, implies a PEG ratio of 1.3x (peak was 2.5x). Net debt/ebitda of 1.6x. Exhibit 2: EPS Growth Key To Stock Performance Exhibit 3: P/E Multiple de-rated from 28x to 13x Source: Thomson Reuters, Morgan Stanley Research estimate Source: Thomson Reuters, Morgan Stanley Research estimates 4

5 Discussion: What-if TPM wins 7-8% total market share in its new Singapore mobiles business? Market's view: Negative. With limited information provided by the company, the market has largely discounted Singapore as a higher risk business, likely to weigh on overall EBITDA margins and returns. Our view: Whilst we agree with the consensus view that investment in Singapore adds to TPM's risk profile we expect TPM to capture market share, generate a reasonable return on invested capital and for the investment to be overall accretive to valuation as TPM deploys a similar success strategy in Australia in Singapore as a disruptive value player. Where we could be wrong: TPM fails to take share and/or takes longer than expected to gain market share TPM requires additional unforeseen capex for its successful roll-out incumbent Singaporean competitors respond to TPM, creating price pressure and inability to generate foreseen margins/returns. TPG Telecom, has grown from a A$1bn market cap in 2011 to A$6bn today by growing its broadband market share from 5% in 2007 to 26% in It was successful in fixed broadband because: 1) price strategy prices on average were ~40% cheaper than Telstra (the incumbent); 2) vertical integration TPM aimed to control the full telco cost chain by owning all the underlying infrastructure; and 3) strong cost control TPM's operating costs (ex-network costs) are 24% lower than the industry average. We acknowledge that this is the first time TPM will be operating as a mobile operator, and believe vertical integration is an area TPM will find it difficult to achieve in Singapore but we do believe TPM will be able to transfer two of these three traits into the Singapore market, particularly positioning themselves as the value player which has proven successful in Australia. In this report, we collaborate with our ASEAN Telco analysts, Mark Goodridge and Alvin Lim, we explore the Singaporean Telecom industry and the potential impact which TPM may have as the 4th entrant in that market. We focus on three key areas; 1. What are Singapore telcos' returns and are they sustainable? We believe current returns are unsustainably high and have already seen incumbent telco's respond to the potential entrance of a fourth entrant. See page What could be TPM's potential market share? We look across the globe for case studies of telco disruptors to find new entrants gain on average 15ppts of post-paid market share over an 8 year period each market is different and the rate of growth is heavily dependent on the amount of capital invested. See pages What will be TPM's strategy in Singapore? We explore 3 key areas: 1) likely price strategy; 2) vertical integration: and 3) cost control. See pages

6 1. What are the Singapore telcos' current returns and are they sustainable? Our ASEAN telco colleagues have undertaken significant work on this topic and they conclude the Singapore telcos' 2015 ROIC averaged 21% almost triples that of the global telco average of ~6-7%. The combination of Singapore's high population density (which broadly speaking means lower capital intensity in building and maintaining telco networks and infrastructure) and relative wealth of the population enables many Singaporeans to afford the latest smartphone devices (i.e. mobile penetration is now at 149%, or average 1.5 mobile devices per person) in our assessment the high global ROIC disparity arises from the ~9% difference by which Singapore's data prices exceed the developed markets' average. We think this is unsustainable and have already seen the incumbent telcos respond to the prospect of an upcoming fourth entrant, with Singaporeans' average implied data prices moving from a 9% premium in March 2016 to a >25% discount currently on new plans in the market. See pages 7 to 9 of ASEAN Telecoms and Media: Singapore: Telecom industry returns are falling we prefer ex-sg exposure (04 Jan 2017). Key takeaway point: the Singapore telco operators have in the past generated super normal profits. We estimate the Singapore mobiles annual revenue market is ~S$4.1bn (A$3.8bn), which is approximately one quarter the size of Australia's A$16bn pa mobile market and with an estimated industry average EBITDA margin of ~35% the profit pool is estimated to be S$1.3bn - S$1.5bn EBITDA annually, a meaningful number. We believe these returns have set-up an opportunity for a disruptive new entrant such as TPM to enter the market and gain traction with customers. Next we explore what would be a reasonable market share assumption for TPM's startup mobiles business in Singapore... Exhibit 4: Singapore data prices have fallen from a 9% premium vs. global peers to a 25% discount Exhibit 5: Singapore has enjoyed superior returns vs. its closest Asia country peers Source: Company data, Morgan Stanley Research. Data as of 10 December 2016 Source: Bloomberg, company websites, Morgan Stanley Research 6

7 2. What could be TPM's potential market share? Globally, we have found there are numerous precedents for this, where new entrants into national telco markets, gain traction with consumers and have a sustained effect on a country's telco industry. To provide a starting point to estimating TPM's potential market share, we look across the world for case studies of global telco disruptors including Wind winning share in Italy, , Softbank's disruption of the Japanese market, , Orange's disruption of the Spanish market, , Telefonica's disruption of the German market, , Illiad's entrance into the French market, 2012, and T-Mobile, in the US, completing its merger with Metro PCS and launching its new disruptive image in The key takeaway: We find on average, disruptors have been successful in gaining 15ppts of post-paid mobile market share over the eight-year period after they entered their respective markets. However, the most recent two examples (T-Mobile and Illiad) gained 13ppts of post-paid share over just a 3 year period. Exhibit 6: Globally, telco disruptors, on average, win 15ppts of post-paid subscriber market share over the 8 years after they enter a market Source: Company data, Morgan Stanley Research. Exhibit 7: On average, global disruptors have grown market share from 16.7% of post-paid subs in Year 1 to 31.3% in Year 8 (+15ppts) Exhibit 8: Global experience is that Disruptors in Mobile post-paid experience a sustained period of market share wins Source: Company data, Morgan Stanley Research. Source: Company data, Morgan Stanley Research. 7

8 Importantly, in talking to our Morgan Stanley colleagues, we found capital requirements have a significant influence on the level of price competition from a potential new entrant. In this case, we estimate capital investment of ~S$300m could enable TPM to offer price discount of ~30% vs. peers and still generate a ROIC of ~8% after four years (Exhibit 1) however, if capex were to be closer to S$800m (as for example, was the size of capital commitment indicated by Consistel's chairman's estimate of a 4G roll out in Singapore) ROIC would be just 3%, assuming the same 30% price discount, and thus, it would be more likely price discounts would be closer to ~5% to achieve a more reasonable ROIC of ~6% (see pages 12 to 13 ASEAN Telecoms and Media: Singapore: Telecom industry returns are falling we prefer ex-sg exposure (04 Jan 2017)). At the announcement of TPM's successful obtaining of the spectrum to operate a mobile business in Singapore on 14 December 2016 it disclosed an estimate of total capex S$ m. These figures were reiterated at the 1H F2017 results today. TPM has purchased 2 lots of 2x5MHz of 900MHz and 8 lots of 5MHz of 2.3GHz for S$105m and plans S$200-S$300m on the rollout of its Singapore network. In Exhibit 9 below, we present our TPM Singapore model in summary we forecast ROIC of 8% is achievable after 4 years from launch (Sep 2018) in F2022E based on TPM achieving 5.9%-6.8% of the total mobile market equating to 11%-13% purely of the post paid market, with k subs, at ARPU S$42-43/pm, to generate revenue of S$261- $307m, out of a total mobiles revenue market of S$4.1bn annually (equivalent to A$3.8bn). We assume an EBITDA margin of 15-20% by F2022E (vs. existing industry average 35%) and a corporate tax rate of 17%. Exhibit 9: Our TPM Singapore Mobiles model Source: Singtel, Starhub and M1; Morgan Stanley Research (e) estimates 8

9 Exhibit 10: Singapore Mobiles Industry model illustrating where our TPM forecasts fit in Source: Singtel, Starhub, M1, Morgan Stanley Research estimates 9

10 Exhibit 11: Singapore Mobile Industry - Subscribers Exhibit 12: Singapore Mobile Industry - Market shares Source: Company data, Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research estimates Exhibit 13: Singapore Mobile Industry - Revenue Exhibit 14: Singapore Mobile Industry - Voice Revenue Source: Company data, Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research estimates Exhibit 15: Singapore Mobile industry - SMS Revenue Exhibit 16: Singapore Mobile industry - Non SMS Source: Company data, Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research estimates 10

11 3. What will be TPM's strategy for its Singapore mobiles business? As discussed earlier, the cornerstone of TPM's success in Australia is being the "value player" in the market and operating at a lower point on the cost curve than its telco peers and we expect this will largely be the same strategy employed in Singapore. What has TPM publicly stated? Comments on strategy have been brief: "This rare opportunity will enable TPM to expand its business into Singapore, bringing tremendous value to Singaporean consumers". "The company expects to start delivering services to customers in 2018 and forecasts that it will become EBITDA positive when it reaches a market share of between 5% and 6% which it believes should be achievable within a short period of time due to the excellent value of the offerings that it will bring to the market". 1 Our thoughts on three points: i) TPM's price strategy Historically we note the TPM's consumer broadband prices in Australia have on average been ~40% cheaper than the incumbent Telstra. TPM has always been the challenger in the Australian broadband market and consequently has matched this with a price driven strategy. Exhibit 17 below shows our estimate that TPM's bundled (phone and broadband) on-net prices have averaged a ~40% price discount vs. Telstra's bundled product. This has been a critical driver in TPM being able to grow its broadband market share from an estimated 5% in 2007, up to 12% in => In Singapore, we expect TPM to apply the same price strategy, with products which are at least 30% cheaper than its local peers. In our modeling, we forecast TPM to launch in September 2018 and to achieve post paid market share of 5% F2019E, 8% F2020E, 11% F2021E and 13% in F2022E. Thus, within four years of launch we forecast TPM to achieve 13% share of the post paid market, which given post paid is ~60% of the total market, equates to ~7% share of total Singapore mobile subscribers - see our modeling in Exhibit 9. Exhibit 17: TPM's monthly Australian ARPU is ~40% lower vs. Telstra since 2009 Source: Company data, Morgan Stanley Research 11

12 ii) Lower cost structure In Australia, TPM's operating costs (ex-network costs) are estimated to be ~24% lower than the industry average. When we analyze the costs of telcos we broadly separate costs into two buckets, network costs and operating costs. Network costs include wholesale rental costs for the networks and underlying bandwidth costs being a fully vertically integrated telco provides the best control of network costs. Operating costs include employee costs, sales and market costs, and building rental, etc. Before TPM became a fully vertically integrated its cost advantage was generated from its very lean operating cost structure. In 2015 TPM operating costs per month were A$16, which is 24% lower than the industry average (see Exhibit 18). TPM have been able to achieve this by 1) having no retail footprint, 2) call centers in Philippines and 3) strong focus on online sales. => We expect TPM to strive for the same strategy in its entrance into the Singapore mobiles market, i.e., to operate on a lower cost curve than its peers. It is not burdened by legacy systems, nor existing profit pools to protect. We do expect TPM to achieve lower margins than its Singapore mobile peers we estimate the industry average mobile margin to currently be ~35% vs. our forecast for TPM to achieve 15-20% - see our modeling in Exhibit 9. Exhibit 18: TPM's operating costs for its Consumer Broadband business in Australia are estimated to be -24% lower vs. industry average Source: Company data, Morgan Stanley Research iii) Strive for vertical integration It has been a critical part of TPM's success in Australia. We have observed that TPM prefers and aims where possible to control the full telco cost chain by owning all the underlying infrastructure. In Australia the retail broadband market broadly consists of 3 underlying infrastructure links and TPM has acquired or built each of these links over time allowing it to now compete against Telstra, the incumbent in the market: a. International bandwidth: This is the undersea cable connecting countries together for example Australia to the West Coast of the USA. TPM owns the PCC-1 cable which runs from Australia to Guam and the US. TPM acquired this in 2009 in its acquisition of Pipe networks. b. Domestic backhaul: The fibre connections that run between the large capital cities around Australia, including metro fibre. TPM owned and operated ~15,000km of domestic backhaul in Australia, vs. Telstra at ~20,000km. TPM acquired Pipe networks 12

13 and also AAPT in 2014 to gain this network footprint. c. Last mile retail: This is the connection from the exchange (which sits at the end of a suburb) to houses/businesses. Today the last mile is owned by Telstra and each player has to rent this last mile from Telstra. Maintaining DSLAMs within exchanges means smaller telcos (vs. Telstra) do not need to rent all the equipment from Telstra and consequently pay a lower wholesale price. TPM owns and operates ~800 DSLAMs around Australia vs. other industry players Optus at a lesser estimated ~370 and Vocus estimated at ~250. =>Looking at Singapore, we believe this vertical integration is the area where TPM will find it more challenging to execute the same strategy as it employs in Australia. We do believe they will be able to leverage its international bandwidth capability into Singapore but will still have to rent bandwidth on another cable because its cable does not land in Singapore. TPM does not own any domestic backhaul in Singapore, rather we expect it to use the current NBN infrastructure to provide connectivity to its mobile cell sites. Finally last mile: TPM should be able to control this, because it is building a mobile network itself. Hence TPM will be able to transport parts of its vertical integration strategy to Singapore but not as complete as in Australia. Last, but not least on strategy, TPM has significant balance sheet capacity to execute its Singapore plans. On top of the existing S$105m spent on spectrum, TPM has stated it will look to spend S$200m to S$300m building its network in Singapore and we are confident it has the capacity to do this. TPM just reported 1H F2017 Net Debt to EBITDA ratio was 1.6x. If we were to assume that TPM could take leverage up to a maximum of 3.25x, which is stated as within its covenants, then we estimate it would have the capacity to effectively double its existing Net Debt (see Exhibit 19 below) obviously, we would think this is too high but the point to make is that TPM has more than adequate capital to support its Singapore expansion. Note: this makes no allowance for the potential for TPM to also become a player in the Australian mobile market, which if it did occur, would also necessitate use of these debt facilities. Exhibit 19: Available Debt for TPM Source: Company data, Morgan Stanley Research (E) Estimates 13

14 Conclusion on this Debate: consensus is too bearish... we think TPM can be successful in Singapore mobiles Like most allocations of capital outside of a company's core business & home market, TPM's decision to invest in a start-up mobile phone business in Singapore brings higher risk. But, whilst acknowledging that risk, we also think it's important to put into perspective, the total TPM investment of S$300-$400m (the equivalent of A$278m- A$370m)... represents < 5% of TPM's current EV of +A$7bn. We believe the consensus view is too sceptical, and in view of the share price weakness immediately after the announced Singapore investment, has likely written it off to zero already. But, we are more optimistic. Our analysis shows: 1. The Singapore incumbent telco operators have been generating excess returns and super-normal profits. As such, we expect Singapore consumers will likely be receptive to a new entrant... with a low pricing strategy. We cite a number of global disruptor examples, and note the two most recent (T-Mobile, Illiad) won ~13ppts of post-paid market share over just a three year period. 2. Whilst new to the Singapore market, TPM has experience and success as a disruptor in the Australian telco market. The cornerstone of TPM's success in Australia is being the "value player" and operating at a lower point on the cost curve than its telco peers and we expect this will largely be the same strategy employed in Singapore. Unlike the encumbents, TPM has no profit pool to protect. 3. We model for TPM to capture 7% of the total mobile market, equating to 11-13% post paid market share within 4 years from Sep 2018 launch. We assume the consumer offer is 30% lower than industry average. Assuming 15-20% EBITDA margins (vs. industry average ~35%) we forecast a ROIC of 8% within 4 years of launch (F2022). In Exhibits 20 and 21 below we present a range of different scenarios. If achieved, we consider this ROIC as acceptable and recognise the investment in our TPM SoTP at A$300m, equating to 36c/share in F2018E. Exhibit 20: TPM Singapore Mobiles EBITDA matrix Exhibit 21: Singapore as a % of total TPM EBITDA Source: Morgan Stanley Research Estimates Source: Morgan Stanley Research Estimates 14

15 1H F2017 earnings slightly ahead of expectations + reiteration of full year EBITDA guidance Exhibit 22: TPM 1H17 Result Summary The most notable 1H features for us were i) higher synergies delivered from iinet acquisition (a cumulative A$80m in 18 months) with a resultant lift in iinet consumer broadband margins; ii) higher growth in the Corporate division and iii) TPG consumer broadband margins actually held steady at 40% in 1H vs. our expectation of decline. Full year F2017 EBITDA guidance was reiterated at A$820m-A$830m, which looks conservative, as it implies zero 2H EBITDA growth vs. the reported +13% in 1H. But, we do expect 2H will be more challenging, with accelerated NBN migrations and also higher TPM marketing expenses. Key points: 1. Key numbers: See table. Source: Company Data, Morgan Stanley Research 2. Earnings Composition TPG Consumer: Rev +8% & EBITDA +7.6% to A$135.2m margins flat at 38% Broadband Rev +8.9% to A$321.4m EBITDA +7.8% to A$127.8m flat at 40% subs +36k to 921k subs (vs. +32k pcp) driven by NBN subs and FTTB consumer subs now at 24k Churn steady at 1.4% Mobile/Other Rev down -3.6% to A$34.6m EBITDA +5.7% to A$7.4m margins +200bps to 21% subs down -16k.. to 288k TPG/AAPT Corporate: Rev +3.8% & EBITDA +7% to A$141.1m margins increased from 41% to 42% Data/Internet revenue +8.9% to A$262.7m Voice down -11% to A$74.8m iinet: Rev +9% & EBITDA +28% to A$141.7m margins increased from 22% to 26%.. driven by organic EBITDA growth Broadband Rev +18% to A$384.3m EBITDA +32% to A$112.6m margins increased from 26% to 29% subs +17k to 990k subscribers driven by NBN subs Fixed Voice Rev -10% to A$91.1m EBITDA +4.6% to A$15.9m margins increased from 15% to 17% Mobile Rev -0.7% to A$26.8m EBITDA +50% to A$3.0m margins increased from 2% to 11% subs -6k to 165k. 3. Outlook/Forward Looking comments: Management reaffirmed full year F2017 guidance reiterated at the AGM in Dec for Underlying full year EBITDA of A$ m Australia capex A$ m & Singapore capex of A$ m (first time guidance) the Singapore capex guidance includes the acquired Singapore capex from the auction in Dec Finally, management noted that it had previously expressed a potential strategic interest in building a mobile/wireless business in Australia, but would not comment on whether it would bid for spectrum in the upcoming 700MHz auction. Management stated that its expectation was that it would not have to issue new equity to fund any of its growth plans, noting the company's current Net Debt/EBITDA ratio of 1.6x vs. its covenant ceiling of 3.25x. Technically, we estimate this provides headroom of ~A$1.4bn, up to A$2.7bn vs. group debt balance of A$1.3bn at 31 Jan balance date. 15

16 Updated TPM Valuation Summary Our 12-month price target decreases to A$10.00/share (was A$10.75): This reflects decreases of 0% to 9% to our FY EPS estimates, from higher depreciation charges due to an increase in capex spend (related to Singapore Mobile investment which was announced 15 December 2016, and we are now incorporating into our financial modeling for the first time). We also model an increase in debt to fund this capex program, which results in an increase to our interest cost assumptions. We derive a fundamental valuation range for TPM of between A$9.11/share and A$10.52/share using three methodologies - DCF, P/E and sum-of-the-parts. Thereafter, we select A$10.00/share as our price target, representing an approximate midpoint of this range. In summary: P/E value is A$9.44/share (was A$10.39), rolled forward to F2018E EPS of 48.4cps (was 52.4 cps) and apply a target P/E multiple of 19.5x (was 22.5x). EPS falls due to higher depreciation and interest expense related to the increase in capex spend. We note the target multiple represents a 30% premium to market (previously used 50%) as the growth profile has moderated to a 3-year EPS CAGR of 7% (from 11%), primarily due to margin compression in the consumer broadband business. SOTP value is A$9.11/share (was A$8.29), rolled forward to F2018E estimates. Our EBITDA forecasts are broadly unchanged, however the increase in value is driven by the roll forward to the higher EBITDA estimate in F2018E of A$890m. Our target EBITDA multiples applied to each business segment range from 5x to 12x (all unchanged). DCF value is A$10.52/share (was A$10.71), based on a WACC of 8.9% and a terminal growth rate of 3% (both unchanged). The valuation slightly decreases as we include incremental capex to support the Singapore Mobile program. This also lifts our net debt to A$1.4bn from A$1.2bn. Morgan Stanley & Co. International plc ( Morgan Stanley ) is acting as financial advisor to Vodafone Group plc ("Vodafone") in relation to a proposed merger of Vodafone India Limited (excluding Vodafone s 42% stake in Indus Towers) and Idea Cellular Limited as referred to in Vodafone's press release published on 20 March There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction. Vodafone may pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report. 16

17 1. P/E Valuation Our P/E valuation is A$9.44/share (was 10.39). Key assumptions include: EPS estimate: We roll forward to F2018E EPS of 48.4cps (was 52.4) and apply a target P/E multiple of 19.5x (was 22.5x). EPS falls due to higher depreciation and interest expense related to increased capex. Target P/E Multiple: The target multiple of 19.5x represents a 30% premium to market (previously 50%) as the growth profile has moderated to a 3-year EPS CAGR of 7% (from 11%), primarily due to margin compression in the consumer broadband business. We note TPM has traded at 30-40% premium to market over the last five years, reflecting above market earnings growth. EPS adjustment: Our EPS estimate is adjusted to exclude non-cash charges of sub acquisition costs to better reflect the cash generation of the business. In F2017E this adjustment adds 4.3c to EPS and 3.6c to F2018E. Exhibit 23: TPM: Fundamental P/E Valuation Source: Thomson Reuters, Morgan Stanley Research Exhibit 24: TPM: 12-Month Forward P/E Multiple Exhibit 25: TLS/SPK/SGT/TPM/IIN Average: 12-Month Forward P/E Source: Thomson Reuters, Morgan Stanley Research estimates Source: Thomson Reuters, Morgan Stanley Research estimates 17

18 2. SOTP Valuation Our sum-of-the-parts valuation is A$9.11/share (was A$8.29). Our EBITDA forecasts are broadly unchanged, however the increase in value is driven by the roll forward to the higher EBITDA estimate in F2018E of A$890m. Our target EBITDA multiples are all unchanged. Key assumptions include: 12x for TPM broadband earnings: This is higher than the 8.5x multiple we apply to IIN, and it reflects: 1) TPM s higher-margin business: FY16 EBITDA margin of 38% vs. IIN at 24%. 2) TPM s continuing organic market share growth, a differentiation vs. its peer IIN, and 3) TPM s increasing vertical integration, which should give it greater control over its cost base. 10x for TPM s mobile business: This is a slight premium to Amaysim (AYS, not covered), a listed MVNO firm which trades at F2018E EV/EBITDA of 8x (Thomson Reuters). We believe AYS is a relevant comp, given both TPM and AYS rent their mobile networks (i.e., TPM from Vodafone) and are both winning subscribers. However, we believe TPM should trade at a premium due its stronger brand name and larger existing customer base which can be sold mobile products. 8x for TPM s PIPE network business and AAPT business: This is a discount to Level 3 ( LVLT-US, covered by Simon Flannery) on 9.5x EV/EBITDA. We view a discount as justified given LVLT's significant scale vs. TPM's PIPE Network. We value AAPT at a premium to the historical take-out multiple of 6.7x, as we think TPM will continue to realise cost synergies over the next two years not captured by a one-year multiple. 8.5x for IIN s business: This is a premium to the historical take-out multiple of 7x, reflective of our view that TPM will continue to realise cost synergies over the next three years not captured by a one-year multiple. Singapore mobile: We also include Singapore mobile at book value which we estimate to be A$300m in F2018E or 36cps. We believe this value is justified by our forecasts which show an EBITDA profit and ROIC of ~8%, three to four years after the launch. Overall, this implies an average EV/EBITDA of ~10x, which is a ~15% premium to the historical average EV/EBITDA multiple of 8.5x for TPM. 18

19 Exhibit 26: Aus Telco Industry Peers TLS/TEL/SGT/TPM/IIN: 12- Month EV/EBITDA Exhibit 27: TPM: 12-Month Forward EV/EBITDA Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research Exhibit 28: TLS: 12-Month Forward EV/EBITDA Exhibit 29: VOC: 12-Month Forward EV/EBITDA Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research Exhibit 30: SPK: 12-Month Forward EV/EBITDA Exhibit 31: SGT: 12-Month Forward EV/EBITDA Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research 19

20 Exhibit 32: TPM: SoTP Valuation Source: Company Data, Morgan Stanley Research. E = Morgan Stanley Research estimates 20

21 3. DCF Valuation Our estimated DCF value in 12 months' time is A$10.52/share (was $10.71). Our EBITDA forecasts are broadly unchanged. However, the valuation slightly decreases as we include incremental capex to support the Singapore Mobile program. This lifts our net debt to A$1.4bn from A$1.2bn. We calculate our 12-month forward estimate by taking the net present value (NPV) today based on our DCF valuation, which is A$9.67/share. We then multiply the NPV by 1+the adjusted cost of equity (10.5%), and subtract the expected dividends over the next 12 months (16.2c). Key assumptions include: WACC of 8.9% (unchanged), based on our Adjusted Cost of Equity (10.5%). Our WACC is in line with the WACC of the other telecom stocks in our coverage universe: TLS (9.6%) and VOC (9.4%). We apply an equity beta of 1, which is below VOC s equity beta of 1.1. This is because TPM is already completely vertically integrated while VOC is only partially integrated. Target debt ratio of 30% based on the assumption that TPM is likely to mirror its telecom peers balance sheet profiles. Our cost of debt is 6% (unchanged) Cost of equity is 10.5%, terminal growth of 3%, risk-free rate of 5.0%, Equity risk premium of 5.5%, cost of pre-tax debt is 6% (all unchanged). Capex equals ~15% of total sales revenue (was ~10-11%), reflecting the roll-out of Singapore mobile. The capex to sales ratio fades from F2020 to below 10% as the Singapore mobile network is completed. Synergies of A$10m of cost synergies per annum for the next two years for AAPT. We also factor in A$60m of cost synergies in FY17 from the IIN acquisition. This grows to A$80m and then A$100m in FY18/19. Consumer broadband market share. TPM raises its broadband market share to 16% (from 13% today) over the next four years. We do not factor in specific share gains from NBN, but we believe there is a significant opportunity here. Consumer broadband margins. TPM becomes a reseller of NBN services and its EBITDA margins decline from 40% today to 30% in FY22. However, TPM s Fibre-To- The-Building plan will allow TPM to sell broadband products without using the NBN, and in doing so at a reduced cost base. 21

22 Exhibit 33: TPM: Summary DCF Valuation Source: Company Data, Morgan Stanley Research. e = Morgan Stanley Research estimates Risks to our Valuation TPM loses market share to its competitors. This results in increased churn and reduction in prices for TPM s products. TPM s business experiences greater-than-expected market share losses, and margins decline further than the expected long-term 30% EBITDA margin. Increased regulation in the telecommunications industry, which restricts TPM to selling only broadband and phone, rather than mobiles also. 22

23 International Telecommunications Valuation Comps Exhibit 34: TPM: International Telecommunication Valuation Comps Consensus Estimates Source: Thomson Reuters, Morgan Stanley Research. Note: Forecasts for all companies are Thomson Reuters consensus 23

24 TPM Income Statement Exhibit 35: TPM: Income Statement Source: Company Data, Morgan Stanley Research. E = Morgan Stanley Research estimates 24

25 TPM Cash Flow Statement Exhibit 36: TPM: Cash Flow Statement Source: Company Data, Morgan Stanley Research. E = Morgan Stanley Research estimates 25

26 TPM Balance Sheet Exhibit 37: TPM: Balance Sheet Source: Company Data, Morgan Stanley Research. E = Morgan Stanley Research estimates 26

27 Endnotes 1 TPM ASX announcement 15 December

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29 STOCK RATING CATEGORY COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIAL INVESTMENT SERVICES CLIENTS (MISC) COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY COUNT % OF TOTAL OTHER MISC Overweight/Buy % % 25% % Equal-weight/Hold % % 21% % Not-Rated/Hold 61 2% 8 1% 13% 8 1% Underweight/Sell % 76 11% 12% % TOTAL 3, Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Stock Price, Price Target and Rating History (See Rating Definitions) 29