All trading involves risk. Losses can exceed deposits.

Australia's digital boom

With earnings season out of the way and a month of trading completed, the heat that has befallen the telecommunications sector over the last few years does not appear to be leaving anytime soon.

All trading involves risk. Losses can exceed deposits.

Most in this space will be aware of the success of Telstra. Since David Thodey took the reins in 2009, TLS has risen 53% and has been the best performing top 20 stock for the last two years running; earnings are growing and Mr Thodey’s mantra of innovation is paying off.

TLS announced that in FY13 it added 2.7 million users to its mobile network, taking its total mobile reach to 15.2 million users as Australian communication consumers look to add two and even three touch points to their communication arsenal.

The ramp up of its 4G network is progressing strongly and Telstra expects to invest 15% of FY14 sales into the network as it looks to the next stage of wireless communication connectivity.

However, what may have been left behind is the performance of the other players in this space. iiNet, Adam Internet (now owned by iiNet) and TPG Telcom have continued on their strong momentum with stellar numbers in their respective niche business.

The stand out is TPG; underlying NPAT of $142.2 million was 1.5% ahead of expectations and massive 24.5% year-on-year. Earnings of $283.1 million were 0.5% ahead of expectations and 8.2% year-on-year.

However, what is really exciting along with the TLS result is the organic growth TPG (TPM) has experienced. In the second half of FY13 alone TPG added 40,000 broadband users to its already 600,000 strong network, and 57,000 were added to its expanding mobile net. These numbers were double digit adds to expectations and the announcement by management to expand its fibre to the building network to reach an additional 500,000 premises and offering its standard 100Mbps unlimited download for a cut price will see external market share growing just as strong.

This additional network weight alone is expected to see similar numbers added over the coming financial years. Even with a higher capex spend expected for the network roll-out, Goldman Sachs sees earnings per share advancing by 2% over the next three years, and consumer EBIT up by 15.8% as it increases its market share and continues its organic growth.

However, there are possible downside risks for TPM. The newly installed government’s revamp of the NBN could adversely affect its network layout. Drafted legislation from the consumer watchdog ARPU may also dilute TPM’s reach as it ‘cherry picks’ plans.

However, on current momentum and announcements, TPM’s future does look rosy. With most investors hungry for mid-cap stock outside of the norm of the last 24 months, it is a stock to watch.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts