Should You Buy TPG Telecom Ltd At This Share Price?

What happened to the TPG share price?

TPG Telecom Ltd [ASX:TPG] has been a highly consistent stock in terms of return on investment. Long-only investors in TPG have been a very happy bunch in the last few years.

TPG is all about growth, via mergers and acquisitions (M&A) and organic means. After buying Iinet, TPG has become the second largest Telco in Australia after Telstra.

What should you do with TPG shares now?

There are two things that I worry about when it comes to TPG. One is its revenue outlook; another is its P/E ratio.

TPG is a growth company. It’s all about income growth and earnings growth. Its share price appreciation has been the result of that growth. So the problem becomes: will TPG be able to sustain its growth rate?

Over the long term, most analysts see TPG to grow at double digits. That is some high expectation.

While that is good news, investors need to keep in mind that TPG is a maturing company. When you have P/E ratios of more than 30 times, you have to think hard about the company’s valuation.

TPG is maturing, when will it come off from its high growth track?

To balance that thought is the company’s apparent ability to drive growth through both M&A and organic growth.

But one thing is for sure, the day for that hyper growth to slow will come…and it may not be too far from now.

When that hyper growth slows, it will reduce to a more moderate growth rate. And it will bring a more moderate growth in share price.

This is why TPG is a good long term investment.

Ken Wangdong

Emerging Market Analyst, New Frontier Investor

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