A senior analyst has described TPG's plan to build Australia's fourth mobile network as "risky" but thinks it could pay off in the long run by reducing the impact on its business of the national broadband network.
Morningstar senior equity analyst Brian Han said TPG's eight per cent growth in underlying earnings to $835 million was a "mirage in the rear-view mirror" with the rollout of the NBN set to hit margins in 2017/18.
He said TPG's $1.9 billion mobile phone network, which was announced in April and focuses on increasing control of its infrastructure in Australia and Singapore, was targeting a highly competitive market dominated by big-name telcos Telstra, Optus and Vodafone.
The iiNet owner on Tuesday announced it was cutting its dividend to redirect cash to the rollout of its mobile services, taking its total payout for the year to 10 cents per share compared to 14.5 cents a year ago.
It also reported it had beaten its earnings guidance and lifted full-year profit by nine per cent, but warned it will face mounting costs in the year ahead as customers shift to the NBN.
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Shares in TPG rose more than five per cent on Tuesday, but plunged to a fresh three-and-a-half year low on Wednesday.
At 1400, they were down 40 cents, or 7.3 per cent, at $5.09.
Mr Han hasn't downgraded its share valuation of $6.00 per share but said TPG's financial position requires close monitoring and could have its lenders worried in the year ahead.
Mr Han said while the rollout of TPG's mobile network would be a financial stress for the company in the medium term, it would eventually ease competition stemming from the NBN.
"Over the long term, we see the strategic sense of TPG having control of more infrastructure, especially something as valuable as mobile - a channel that is increasingly becoming a default port of communications for consumers," Mr Han said.
"All these moves, in our view, point to TPG's long-term strategic desire to limit (perhaps even bypass) the margin-crunching impact of the NBN and enjoy greater control of its own destiny."
