TPG Telecom shares slip as analysts flag downside risk
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The news: TPG Telecom shares slide as analysts see downside risks relating to the company’s plan to reinvest proceeds from its asset sale to Vocus, which was announced on Tuesday.
The numbers: At 1:40pm AEST, shares in TPG Telecom had slipped 1.6% to $5.42. Morning trades were cancelled after an announcement relating to global asset manager TPG was incorrectly cross-referenced with TPG Telecom’s ticker.
The context: On Tuesday, TPG Telecom announced it would use the cash proceeds from the sale of its fibre network assets and fixed-line business to Vocus for capital return and debt reduction, with a $688 million reinvestment plan also being offered to minority shareholders.
Jarden analysts said they see “downside risk associated with the reinvestment plan”. If the take up is lower than 100%, the analysts expect “the resulting elevated gearing and reduced free-float to weigh negatively”.
They downgraded their position on the stock from ‘overweight’ to ‘neutral’ and cut the target price from $5.50 to $5.30.
Morningstar director of equity research Brian Han questioned why the capital management plan is “so complicated”, but retained its $6.40 fair value estimate on no-moat TPG.
What they said: “Management justified the reinvestment plan as a way to improve liquidity by issuing almost 180 million new shares, thereby, lifting free float to 30% from 23%," Han said.
"It is not clear why minority shareholders are being asked to dilute their capital return to achieve this objective."
He also added that the “noise surrounding capital management is clouding the momentum building in the remaining mobile unit", which is evident in its pro forma earnings guidance that was also announced on Tuesday.
The sources: Jarden research, Morningstar research
