At TPG, the Difficulties of Taking on the Umpire; No Change to Our Ratings or Fair Value Estimate

TPG Telecom's temporary withdrawal of its new fibre-to-the-basement (FTTB) product from retail sale highlights the potential perils of taking on the government-owned NBN, especially when the federal government also retains the power to set carrier license conditions (CLCs) on industry participants. The government’s CLC, released in mid-December 2014, is likely to cause cost burdens on TPG, and lower the potential returns available from this new network. We're conceptually very upbeat on the potential returns for TPG from this network, given that it could potentially cherry-pick the most profitable customers from the NBN, with a relatively low incremental capital expenditure network. However, with the regulatory situation still very fluid, we are only factoring in limited upside from this project into our forecasts. No material changes to our earnings forecasts. We retain TPG's fair value estimate at AUD 6.50 per share, with the market fairly valuing the company at the current share price. We maintain our narrow economic moat and medium uncertainty ratings.