TPG lifts profit but warns of NBN pressure

TPG Telecom's move to douse speculation of an equity raising sentits stock price up as much as 10 per cent on Tuesday.

The news that the telco had room to borrow if capital was needed eclipsed a cut in TPG's final dividend for the year through July, as well as a forecast decline in pre-tax profit next year in anticipation of increased competition as it released its results.

"People are happy it can now borrow more and therefore it may not need an equity raising to fund mobile capex and spectrum payments," said senior analyst David Spotswood at wealth manager Shaw and Partners.

TPG's share price has fallen more than 80 per cent since peaking in July last year as it struggles for profit growth. In April, it said it planned to spend A$1.4 billion ($1.12 billion) building a fourth-generation (4G) communications network to better compete.

On Tuesday, it said it would pay for the network and other commitments with the help of debt facilities that had increased 46 percent to $2.38 billion. It also said the facilities' terms had improved.

TPG also cut its final dividend to its lowest since 2011 at 2 Australian cents a share from 7.5 cents in July last year.

"The board has concluded that it is in the best interests of shareholders that a greater proportion of profits be retained in the company to be deployed in the mobile rollouts," said Executive Chairman David Teoh, who owns 34 percent of TPG.

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"The board is confident that this course will prove in the long run to be the right decision for shareholders."

Profit for the 12 months to July 31 rose to $413.8 million on a 4 per cent revenue lift following the full integration of the iiNet business that TPG acquired in 2015.

Underlying earnings rose 8 per cent to $835 million - surpassing the $820 million to $830 million guidance range issued in April.

The telco said its mobile network will be up and running in parts of Sydney, Melbourne and Canberra ahead of schedule by the middle of next year.

Chief financial officer Stephen Banfield forecast earnings to fall to between $800 million and $815 million in 2017/18, with roughly 400,000 to 500,000 fixed line subscribers expected to shift to the NBN.

That will incur higher connection fees for service providers.

Mr Banfield said the telco remains "comfortable" with its initial capex guidance of $600 million over the next two to three years for the mobile network but didn't say when the project was expected to break even.

Nonetheless, investors seemed impressed, driving TPG shares up by more than 6 per cent to $5.555 at 1528 AEST.

Citi analyst David Kaynes said the midpoint of the weaker-than-expected outlook was 4 per cent below current consensus of $843 million.

"This result highlights the broader challenges facing the Australian telecom industry with guidance for EBITDA declines in FY18 reflecting the margin compression due to the migration of consumer broadband services to NBN," Mr Kaynes said.

He values TPG at $6.70 per share.

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