TPG Telecom. Changing our tune

Vol m Telco - Integrated Australia Equity research December 6, 2017 HOLD (previously REDUCE) Current price: Target price: Previous target: A$6.11 A$5.95 A$4.30 Up/downside: -2.6% Reuters: Bloomberg: Market cap: Average daily turnover: TPM.AX TPM AU US$4,324m A$5,661m US$10.37m A$13.34m Current shares o/s 926.2m Free float: 39.8% Key changes in this note We upgrade from a Reduce to a Hold. No material changes to normalised EPS over the next three years. Our valuation has increased due to: 1) applying a higher peer EV/EBITDA multiple (9x from 7x); and 2) increased medium term earnings as TPM s Au mobile business starts to gain traction and offset earnings declines from NBN in the outer years. 7.60 7.10 6.60 6.10 5.60 5.10 4.60 25 20 15 10 5 Price Close Price performance 1M 3M 12M Absolute (%) 6.3 13.4-9.5 Relative (%) 6.4 8.9-19 Nick Harris T +61 7 3334 4557 E nick.harris@morgans.com.au Relative to S&P/ASX 200 (RHS) Dec-16 Mar-17 Jun-17 Sep-17 Source: Bloomberg James BARKER T (61) 7 3334 4893 E james.barker@morgans.com.au 110.0 101.7 93.3 85.0 76.7 68.3 60.0 TPG Telecom Changing our tune TPM hosted their AGM and provided little new news. We upgrade our TPM recommendation from Reduce to Hold largely on the view that it is looking increasingly likely to us that the NBN will fail financially faster than we originally anticipated. This could be a positive for consumers, TPM and telcos alike. We have written extensive research into why this is likely to happen but picking the timing is difficult. It could happen within 12 months (if it s a political decision to fix NBN speeds) or it could happen in 5 years (if it s delayed until the facts are irrefutable i.e. when the last customer is forced off legacy networks). The investment market appears to be taking the view that this will happen sooner rather than later and we are increasingly of this view; hence the upgrade to a Hold. AGM commentary guidance and mobile rollout tracking well TPM re-iterated that FY18 guidance is tracking well. Executive Chairman, Mr David Teoh, commented that Directors are disappointed about the margin headwinds from the NBN but confident that the strategies we are implementing will continue to create excellent value for shareholders over the long term. Delays to the NBN rollout (500k less NBN migrations expected in FY18) should be positive for TPM (as TPM keeps higher margin on-net customers longer) so we see this as an upside risk to guidance. The Australian mobile rollout is progressing with initial site clusters in Sydney, Melbourne, Canberra, Adelaide and Brisbane expected to be complete by mid-2018. NBN increasingly looking like becoming an upside risk for TPM In our view, numerous competing technologies are a real threat to the NBN and we believe the NBN s economics are destined to fail. See our notes "NBN economics under inspection and Regulatory ramblings cut short for further details. Ultimately we think the NBN will have to lower last mile access prices which would be a positive for telco and TPM s earnings (relative to the alternative which is a large decline). Our original view was that this could happen in FY22 (when the last customer is forced onto the NBN and the numbers are irrefutable). However, we are increasingly seeing evidence that this could happen earlier. The NBN is a political problem (due to disgruntled NBN customers who are also voters). It is possible, although maybe an extreme view, that the government could write-off the ~A$30bn of equity invested in the NBN and lower last mile access costs to solve a significant part of the NBN s speed problems. Having the NBN remove the CVC charge and charging the current line rental fee only (AVC) would de-bottleneck speeds and likely impress voters, in our view. TPM has the most to gain and the most to lose from the NBN, in our view. TPM s FTTB and mobile network rollouts are both positioned as assisting TPM s earnings should the NBN not lower last mile access costs. Upgrading our investment view to a Hold We upgrade our recommendation from a Reduce to a Hold, largely on the view that the NBN will falter which would ultimately be a good thing for TPM. We have rebuilt our TPM model to better include the earnings shift from mobile and also increased the peer multiple applied to our EV/EBITDA valuation. The net result is that our valuation increases from A$4.30 to A$5.95 and we upgrade to a Hold recommendation. Financial Summary Jul-16A Jul-17A Jul-18F Jul-19F Jul-20F Revenue (A$m) 2,388 2,491 2,598 2,679 2,751 Operating EBITDA (A$m) 849.4 890.8 812.5 783.4 778.5 Net Profit (A$m) 384.3 415.7 338.9 240.4 185.1 Normalised EPS (A$) 0.43 0.48 0.40 0.29 0.22 Normalised EPS Growth 33.5% 13.4% (16.2%) (27.7%) (23.5%) FD Normalised P/E (x) 13.73 12.54 14.60 20.89 27.30 DPS (A$) 0.15 0.10 0.04 0.04 0.04 Dividend Yield 2.37% 1.64% 0.70% 0.65% 0.70% EV/EBITDA (x) 7.68 6.89 8.85 9.82 10.19 P/FCFE (x) 1.83 NA 23.36 20.98 34.38 Net Gearing 75.2% 35.8% 56.7% 70.1% 74.6% P/BV (x) 2.91 2.20 2.10 1.95 1.85 ROE 25.9% 20.0% 14.7% 9.7% 7.0% % Change In Normalised EPS Estimates 1.24% (0.87%) 3.03% Normalised EPS/consensus EPS (x) 0.98 0.97 0.95 SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP Powered by EFA

Figure 1: Financial summary Profit and loss Jul-16A Jul-17A Jul-18E Jul-19E Jul-20E TPG Telecom - valuation details Revenue 2,387.8 2,490.7 2,597.5 2,679.2 2,751.2 Share Price $6.11 Market Cap A$4,733.5m Operating costs 1,538.4 1,599.9 1,785.1 1,895.7 1,972.7 Price Target $5.95 EBITDA 849.4 890.8 812.5 783.4 778.5 Total shareholder return -2.0% WACC 8.8% Depreciation -136.9-141.1-182.5-266.8-316.7 Recommendation HOLD Amortisation & impairments -115.1-103.3-105.2-150.0-184.1 Multiple Weighting Valuation EBIT 597.4 646.4 524.8 366.6 277.7 DCF n.a. 50.0% $5.56 Net Interest Income -83.6-50.9-41.3-23.7-13.7 EV / EBITDA 9.0 x 50.0% $6.33 Pre-tax Profit 513.8 595.5 483.5 342.9 264.0 Weight valuation $5.95 Tax -129.5-179.8-144.6-102.5-78.9 Premium / (discount) 0% Reported Profit 384.3 415.7 338.9 240.4 185.1 Price Target $5.95 Exceptional items -23.3 1.6 35.7 30.5 22.2 Normalised profit 361.0 417.3 374.6 270.8 207.3 Key metrics/ multiples Jul-17A Jul-18E Jul-19E Jul-20E Gross dividends 123.0 86.4 39.4 37.0 39.4 Cash P / E 12.7 15.1 20.9 27.3 FY18 guidance - Underlying EBITDA of A$800-815m Yield 1.6% 0.7% 0.7% 0.7% FY18 capex guidance of ~A$600m plus a further A$595m on Au Mobile Spectrum PEG 0.9-0.9-0.8-1.2 Cash flow statement Jul-16A Jul-17A Jul-18E Jul-19E Jul-20E EV / EBITDA 6.9 8.8 9.8 10.2 EBITDA 849.4 890.8 812.5 783.4 778.5 Price / Book Value 2.2 2.1 2.0 1.9 Net interest -84.6-52.3-44.5-31.2-29.5 Price / Net Tangible Assets -22.6 44.3 12.4 7.3 Tax -138.8-147.0-144.6-102.5-78.9 Operating cash flow yield 14.2% 12.5% 14.0% 14.2% Changes in working capital -167.5-21.1-31.5 11.5 3.3 Free cash flow yield (pre exp 11.8% 10.0% 11.4% 11.6% Operating cash flow 458.5 670.4 591.9 661.2 673.4 Free cash flow yield 2.0% -12.5% -9.5% -4.3% Maintenance capex -90.0-112.1-116.9-120.6-123.8 Free cash flow (pre expansion) 368.5 558.3 475.0 540.6 549.6 Per share data Jul-17A Jul-18E Jul-19E Jul-20E Total capex -246.9-576.3-1,182.9-1,112.0-878.5 Shares on issue 864.3 926.2 926.2 926.2 Free Cash Flow 211.6 94.1-591.0-450.8-205.1 Reported EPS (A$) 0.49 0.38 0.26 0.20 Acquisitions and divestments 0.0 0.0 0.0 0.0 0.0 Normalised EPS (A$) 0.48 0.40 0.29 0.22 Other Investing cash flow 1,735.5-119.2 45.2 20.6 19.7 Dividends per share (A$) 0.100 0.043 0.040 0.043 Investing cash flows 1,488.6-695.5-1,137.7-1,091.4-858.8 Payout ratio 20.6% 11.2% 15.4% 21.3% Increase / decrease in Equity 326.9 400.3 0.0 0.0 0.0 Increase / decrease in Debt 757.8-450.0 780.0 700.0 350.0 Result quality Jul-17A Jul-18E Jul-19E Jul-20E Dividends paid -108.4-133.8-38.1-39.4-34.7 Cash flow conversion 97.6% 96.1% 101.5% 100.4% Other financing cash flows 0.0-7.4 0.0 0.0 0.0 FCF vs. NPAT 22.5% -157.7% -166.5% -99.0% Financing cash flows 976.3-190.9 741.9 660.6 315.3 Gross dividends vs FCF 91.8% -6.7% -8.2% -19.2% Balance Sheet Jul-16A Jul-17A Jul-18E Jul-19E Jul-20E Gearing Jul-17A Jul-18E Jul-19E Jul-20E Cash And Deposits 39.2 46.3 155.2 351.9 458.2 Net Debt 859 1,530 2,033 2,277 Debtors 145.2 131.6 121.1 126.3 129.7 Net Debt / Equity (x) 0.36 0.57 0.70 0.75 Inventory 12.0 6.4 6.5 6.8 7.0 Net Debt / EBITDA (x) 0.96 1.88 2.59 2.92 Other current assets 162.2 26.9 26.9 26.9 26.9 EBIT interest cover (x) 12.7 12.7 15.5 20.3 Total Current Assets 358.6 211.2 309.7 512.0 621.7 Invested Capital 3,237 4,198 4,946 5,332 Fixed Assets 895.1 1,055.5 2,055.9 2,901.1 3,462.9 Enterprise Value 6,140 7,189 7,692 7,936 Investments 6.4 2.9 2.9 2.9 2.9 Goodwill & Intangibles 2,485.2 2,632.5 2,572.5 2,443.1 2,278.7 Growth ratios Jul-17A Jul-18E Jul-19E Jul-20E Other non-current assets 25.7 8.9 8.9 8.9 8.9 Revenue 4.3% 4.3% 3.1% 2.7% Total Non-Current Assets 3,412.4 3,699.8 4,640.2 5,356.0 5,753.4 Operating costs 5.8% 16.2% 15.0% 20.6% TOTAL ASSETS 3,771.0 3,911.0 4,949.9 5,867.9 6,375.1 EBITDA 4.9% -8.8% -3.6% -0.6% Short Term Debt 27.1 32.5 168.5 238.5 273.5 NPAT 15.6% -10.2% -27.7% -23.5% Creditors 298.0 289.4 247.5 264.5 271.3 Reported EPS growth 2.5% -22.0% -31.4% -23.0% Other current liabilities 188.8 245.7 245.7 245.7 245.7 Cash EPS growth 13.4% -16.2% -27.7% -23.5% Total Current Liabilities 513.9 567.6 661.6 748.7 790.5 DPS growth -31.0% -57.5% -5.9% 6.3% Long Term Debt 1,350.4 872.4 1,516.4 2,146.4 2,461.4 Operating cash flow 46.2% -11.7% 11.7% 1.8% Other Non current liabilities 127.5 71.7 71.7 71.7 71.7 Total Non -Current liabilities 1,477.9 944.1 1,588.1 2,218.1 2,533.1 Margin analysis Jul-17A Jul-18E Jul-19E Jul-20E TOTAL LIABILITIES 1,991.8 1,511.7 2,249.8 2,966.8 3,323.6 EBITDA Margin 35.8% 31.3% 29.2% 28.3% Issued capital 1,051.9 1,449.4 1,750.2 1,951.3 2,101.6 EBIT margin 26.0% 20.2% 13.7% 10.1% Retained earnings 686.1 968.0 968.0 968.0 968.0 Cash NPAT margin 16.8% 14.4% 10.1% 7.5% Other reserves and FX 41.2-18.1-18.1-18.1-18.1 Cash ROE 17.4% 13.9% 9.3% 6.8% TOTAL EQUITY 1,779.2 2,399.3 2,700.1 2,901.2 3,051.5 ROIC 20.0% 12.5% 7.4% 5.2% SOURCE: MORGANS RESEARCH, COMPANY 2

Why have we changed our investment view? 1) We have always thought the NBN is destined to fail financially and this would be a positive for TPM. However until that event happens, there is further downside risk to TPM s earnings. We think the NBN s last mile access costs are currently unsustainably high and need to be reduced from A$43 now (and A$52 medium term) back towards the pre NBN cost of ~A$15 per month. Otherwise the NBN won t be used as much as expected so lower take-up and lower revenue per user will cause the NBN s financials projections to fail, in our view. 2) The current status quo is that the NBN s higher last mile access costs compress earnings for TPM and other telcos for another five years as the last fixed line customers are forced onto the NBN. At this point in time NBN take-up and ARPU will be irrefutable and the NBN is forced to lower last mile access prices. Lowering last mile access prices would substantially improve telco earnings and this is the ideal point in time to buy TPM (as TPM has the most upside and downside from the NBN). 3) We now think that for political reasons the breaking point in the NBN could happen earlier than we originally expected. It is possible that in order to fix one of the core NBN problems (slow speeds) and appease voters (many of whom happen to be disgruntled NBN customers) the government could write off the ~A$30bn of equity invested. 4) Writing off the equity would allow the NBN to lower its last mile access cost by a commensurate percentage (and still generate a return on invested capital above the bond rate). This would allow the NBN to remove its CVC/volume fee which is causing telcos to provide low speeds (as its financially damaging to telcos to provider higher speeds). 5) What may force change? The ACCC recently published a communications sector market study and the ACMA recently published its 5-year spectrum outlook plan 2017-2021. Both suggest to us that the regulators are opposed to taxing competing technologies to subsidise the NBN and that the NBN economics are destined to fail. Overall we view the outcome from these two reports as a positive for consumers and competition, and believe this paves the way for a potential reversal of telco investor sentiment. 6) Our summary of the key takeaways from these reports are: a. acknowledgement that the NBN is not economically sound; b. a recommendation that the government not tax competing wireless technologies to fund the NBN; c. mobile spectrum refinements, including broader spectrum sharing recommendations; and d. a timeline for 5G. 7) For the longer summary of these, two reports refer to them directly: "NBN economics under inspection and Regulatory ramblings cut short. 3

Mobile broadband is already a substitute to NBN so TPM s mobile network will be key The most recent Australian Bureau of Statistics or ACCC data shows: The average fixed line download per subscriber month is 137 GB; The average mobile download per subscriber is 2 GB; and 50% of NBN plans download less than 95 GB per month. Today 4G is already a real threat to the NBN and 5G will be substantially more of a challenge. Optus has recently launched / started experimenting with mobile only as a full substitute to fixed line. The key point from Figure 2 below is that Optus is offering 140 GB on mobile only and 137 GB is the average amount of data downloaded per month on the fixed network according to the ABS. Optus has launched what appears to us to be a game changing product competing directly with the NBN. We would expect TPM to do something similar when its mobile network is released. Broadly speaking Optus s offering is A$10 less than the average NBN plan and offers as much data as the average Australian household downloads each month on a fixed broadband plan. Figure 2: Optus s high volume mobile BB product is offering 140 Gb for $70 SOURCE: COMPANY DATA Below we list some examples of telcos already offering competitive mobile plans: Vivid wireless (Optus) offering 200 GB of wireless data for A$70 per month and unlimited for A$90 per month. This is advertised as 12 Mbps down and 1 Mbps up and given 29% of NBN plans (by the ACCC s AVC count) were 12 Mbps, this is already broadly competitive with NBN plans; Amaysim (an Optus reseller) is offering 70 GB for A$80 per month; Telstra s wireless product the Nighthawk offers 40 GB for A$84 per month and 80 GB for A$150 per month. We think TLS is, for now, somewhat constrained in offering competitive wireless products due to its NBN noncompete; Belong (TLS s challenger brand) now offers 15 GB for A$40 per month; Vodafone is offering 50 GB for A$60 per month; and TPG is offering 12 GB per month for A$25 but this is positioned as a mobile (SIM only) product, for now. 4

Our average mobile speeds are already 3x fixed speeds While Australia languishes with respect to fixed line speeds (11Mbps according to Akamai), it is in the top 10 mobile speeds globally (34Mbps according to OpenSignal). Mathematically, the average NBN speed is ~32Mbps (in theory but not reality) so already our mobile network is on par. The introduction of 5G and other wireless last mile technologies, which are not going to be regulated, are a very real threat to the NBN and, in our view, will cause its financial model to fail. TPM will bring its 4G mobile network to market over the next two to three years and this will be helpful, in our view, to combat the NBN impact. Figure 3: Au has the 7 th best 4G mobile network in the world with an average speed of 34Mbps SOURCE: OPEN SIGNAL; AKAMAI; MORGANS RESEARCH, COMPANY NBN speed disclosures On the negative side the ACCC recently released guidelines for how telcos should advertise their NBN plans. This is currently about better informing the consumer on what they are purchasing. However it has the potential to drive up telco costs as it will help better segment the market so consumers can see the different quality of services across different providers. Currently NBN is all about price but over time speeds provisioned (aka contention ratios) will become increasingly important and consumers may be willing to pay slightly more for better guaranteed speeds. Figure 4: ACCC guidelines for typical Broadband speeds in peak hours of 7-11pm SOURCE: ACCC 5

NBN August 2017 business plan has since been downgraded The key problem is the NBN s rollout forecasts in its 2018 Corporate Plan (depicted below). FY18 rollout assumptions/forecasts have been downgraded and we are of the view that FY19 net add rollout forecasts will also need to be downgraded. Figure 5: NBN premises activated by FY20 Premises Activated FY16 FY17 FY18 Old FY18 New FY19 * FY20 FTTP Brownfields 0.7 0.8 0.8 0.6 0.7 0.9 FTTP Greenfields 0.2 0.2 0.3 0.3 0.4 0.5 FTTN 0.1 0.9 2.1 2.1 3.6 4.2 HFC 0 0.1 0.9 0.6 1.2 2 Fixed Wireless 0.1 0.2 0.2 0.2 0.3 0.3 Satellite 0 0.1 0.1 0.1 0.2 0.2 Total 1.1 2.3 4.4 3.9 6.4 8.1 Net adds new 1.2 2.1 1.6 2.5 1.7 SOURCE: NBN Co; TLS; *MORGANS ASSUME 0.5M DELAY TO FY18 HAVE A KNOCK EFFECT AND DELAYS FY19 BY THE SAME AMOUNT Market share of the ISPs regional vs metro It is relevant to sanity check NBN market share versus metro and regional market share of the big 4 as the NBN s rollout has been largely regional to-date but is now moving into the metro area so market share is likely to change. Figure 6: Broadband market share SOURCES: COMMUNICATIONS SECTOR MARKET STUDY DRAFT REPORT We estimate TLS s market share pre NBN was ~48%. The figure above illustrates TLS has a dominant regional market share of ~55% versus a lower metro market share of ~45%. To-date, TLS has taken ~50% of the NBN net adds so is tracking better than many expected (ie tracking lower than its regional average but above its metro average). We estimate TPM s market share pre NBN was ~27% and the figure above illustrates TPM has 18% regional market share (which are mostly iinet subscribers) and around 26% metro market share. TPM s combined NBN market share is ~23% and it is tracking above its regional market share but below its metro average. NBN market share trends from the lastest ACCC quarterly TLS remains the dominant provider (>50% fixed line market share) on the NBN despite the NBN originally being anticipated to level the playing field. Figure 7: Cumulative total of NBN market share (fixed only) (quarterly and ACCC disclosed) Name Apr-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Telstra 48.0% 48.7% 49.6% 50.6% 51.1% 51.3% 50.5% TPG 28.5% 27.5% 26.7% 25.7% 24.9% 24.3% 23.5% Optus 14.8% 14.5% 13.9% 13.8% 13.6% 13.5% 14.1% M2 / Vocus 5.9% 6.6% 7.3% 7.4% 7.8% 8.3% 8.9% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% SOURCES: ACCC, MORGANS, COMPANY REPORTS 6

TPM s NBN market share continues to weaken from ~27% legacy (TPM and iinet) to ~20% in the September quarter. Figure 8: Share of net NBN adds for the quarter (ACCC disclosed) Name Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Telstra (legacy 48%) 52.0% 53.5% 55.2% 53.1% 52.0% 47.1% TPG (legacy 27%) 23.0% 23.6% 20.9% 21.2% 21.8% 20.0% Optus (legacy 15%) 13.4% 11.5% 13.0% 12.8% 13.3% 16.7% M2 / Vocus (legacy 5%) 9.8% 9.9% 8.3% 9.4% 10.2% 11.6% Other (legacy 5%) 1.7% 1.5% 2.6% 3.5% 2.7% 4.7% Average 25 Mbps price (RHS) $ 86.96 $ 96.65 $ 87.48 $ 84.98 $ 79.98 $ 79.98 SOURCES: ACCC, MORGANS, COMPANY REPORTS 25Mbps NBN plan prices On a 12-month view 25Mbps NBN plan prices have declined 17% or A$17 (from A$96.65 to A$79.98 per month on average). These price declines occurred between January 2017 and June 2017 and have since stabilised. NBN plan prices have been stable over the last quarter (July 2017 to September 2017) with no changes to prices or inclusions from the big 4. If we include Amaysim in the pricing equation average ARPU for a 25Mbps plan has declined by 2% or A$1.50 in the current quarter (Amaysim lowered its plans from A$70 to A$60). At its AGM Amaysim noted 10k NBN subscribers and that 50% came from existing mobile/energy customers. NBN market share trends company disclosures We combine ASX or company disclosed NBN subscribers with the NBN disclosed total active NBN subscribers in the following table. These data points don t always add up (due to timing difference) and comparing these shows a large increase in other on non-big 4 subscribers in June 2017, which we suspect is an error. ACCC disclosed figures (Figure 8 above which compares apples and apples) shows other market share at about half this rate. 7

Figure 9: NBN subscriber trends CUMULATITVE NBN SUBS Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec 17 F Telstra 0 0 85 93 211 500 792 1,176 1,462 TPG & iinet 50 80 126 194 276 388 561 719 835 Optus 0 0 26 54 88 136 192 279 341 VOC / M2 0 0 0 74 60 69 113 178 227 Other 81 131 85 71 101 6-5 91 161 Active NBN subs 131 211 322 486 736 1,099 1,653 2,443 3,026 3,026 CUMULATIVE NBN SUBS MKT SHARE Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec 17 F Telstra n/a n/a n/a 19.1% 28.7% 45.5% 47.9% 48.1% 48.3% TPG & iinet n/a n/a n/a 39.9% 37.5% 35.3% 33.9% 29.4% 27.6% Optus n/a n/a n/a 11.1% 12.0% 12.4% 11.6% 11.4% 11.3% VOC / M2 n/a n/a n/a 15.2% 8.2% 6.3% 6.8% 7.3% 7.5% Other n/a n/a n/a 14.6% 13.7% 0.5% -0.3% 3.7% 5.3% Active NBN subs n/a n/a n/a 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% NET ADD NBN vs 6 MONTLY AGO Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec 17 F Telstra n/a n/a n/a 8 118 289 292 384 286 TPG & iinet n/a n/a n/a 68 82 112 173 158 116 Optus n/a n/a n/a 28 34 48 56 87 62 Vocus n/a n/a n/a 74-14 9 44 65 49 Other n/a n/a n/a -14 30-95 -11 96 70 Total active NBN net adds for the half n/a n/a n/a 164 250 363 554 790 583 NET NBN ADDS hoh MARKET SHARE Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec 17 F Telstra n/a n/a n/a 4.9% 47.2% 79.6% 52.7% 48.6% 49.0% TPG & iinet n/a n/a n/a 41.6% 32.8% 30.9% 31.2% 20.0% 20.0% Optus n/a n/a n/a 17.1% 13.6% 13.2% 10.1% 11.0% 10.7% Vocus n/a n/a n/a 45.2% -5.6% 2.5% 7.9% 8.2% 8.4% Other n/a n/a n/a -8.8% 12.0% -26.2% -2.0% 12.2% 11.9% NET ADDS hoh MARKET SHARE n/a n/a n/a 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% SOURCE: MORGANS RESEARCH, COMPANY DATA, ACCC, NBN; NOTE DIFFERENT SOURCES DON T MATCH SO THIS IS FOR VIEWING TRENDS ONLY Forecast, valuation and recommendation changes We have made no material changes to our short-term TPM forecasts but have upgraded our medium-term forecasts to better include the earnings contributions from Australian and Singaporean mobile. In the short term we still expect the NBN to compress TPM s profitability but in the medium term we think mobile will more than offset this and that the NBN is increasingly likely to fail (sooner rather than later which would create short-term upside risk). Figure 10: Forecast and valuation changes FY18 old FY18 New % change FY19 old FY19 New % change Revenue 2,609.8 2,597.5-0.5% 2,679.4 2,679.2 0.0% EBITDA 807.4 812.5 0.6% 796.4 783.4-1.6% Cash NPAT 370.0 374.6 1.3% 273.2 270.8-0.9% Reported EPS 37.0 37.9 2.3% 26.0 26.0-0.2% Normalised EPS 40.0 40.4 1.1% 29.0 29.2 0.8% Free Cash Flow -655.8-591.0 9.9% -485.3-450.8 7.1% DPS 4.0 4.3 6.3% 4.0 4.0 0.0% DCF $4.08 $5.56 36.4% Remodelled EV/EBITDA $4.51 $6.33 40.4% Was 7x now 9x Weighted valuation $4.30 $5.95 38.3% Premium / (discount) 0.0% 0% n.m. Price target $4.30 $5.95 38.3% SOURCE: MORGANS RESEARCH, COMPANY 8

Risks and rewards Management have a strong track record of delivering value when the drivers have been within their control. Unfortunately one of the key drivers of TPM s earnings outlook for the next few years is NBN and its implications for TPM s earnings. From an earnings perspective upside risk relates to NBN delays (TPM keeps it higher margin on-net customers longer) while downside relates to NBN progress (as lower margin NBN eats away at higher margin on-net and lowers profitability per customer). Offsetting this TPM have undertaken an extensive capex program for mobile in Australia, mobile in Singapore and Fibre To The Basement in Australia. Collectively this necessitates a very large investment, which has the potential, in our view, to make or break, the company. We forecast capex at nearly double operating cashflow for the next few years (since the NBN negatively impacts EBITDA and cashflow). This means TPM s net debt goes much higher and their free cashflow is non-existent for the next three years, on our forecasts. In our view, NBN margin erosion and the ability to offset this through cost reductions (and over time to some extent TPM s new mobile networks) remains the key upside and downside risk for TPM. TPM has done a commendable job of reducing costs and simplifying acquired businesses (Pipe Networks, AAPT and iinet). Two of these three businesses were TPM s key suppliers so it was vertically integrating. iinet however is a predominately consumer facing business with higher customer advocacy so TPM needs to tread more carefully with respect to integration and cost out. We note that iinet Broadband subscriber numbers declined by 11,000 in FY17 and TPM s market share continues to track lower in the NBN (versus its legacy market share). 9

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