Tuesday, November 25. 2008Another Contribution To The 'Penny Dreadful' Share SectorJohn Linton TPG/Soul's share price closed at 9.5 cents yesterday reaching, for the first time, the 'penny dreadful' status it had been hovering above for some time now (penny dreadful = share certificates valued at single digit cents for those who are unfamiliar with the old fashioned term first applied to ultra cheap pulp fiction): Of course the overall share market has followed a similar trend and it may well be the case that TPG/Soul is simply a 'victim' of the "GFC" - like so many other listed companies. Indeed the overall performance of communications companies has hardly been 'stellar' over the last calamitous share price 12 month period as can be seen from this chart: http://markets.smh.com.au/apps/mkt/industrylisting.ac?code=50 The utterly surprising aspect of TPG's massive slide (it is now worth less than 20% of what it was at the time of the merger of TPG with Soul) is that the market capitalization of the company ($A64,999,02) is far less than the current 'market guidance' TPG is giving the ASX on its likely profits for the current financial year (only 7 months away) of a little over $A90 million! http://news.theage.com.au/business/sp-telemedia-reports-full-year-loss-20080923-4m5l.html The other two penny dreadful ISPs (People Telecom and EFTel - admittedly valued much lower than TPG - make either no money at all or an 'on paper' profit of SFA) but TPG has announced, and subsequently confirmed, that it will make more money than any other Australian communications provider except Telstra and Optus and it will make a gigantic PE that makes Telstra's look like peanuts and, as far as I can see, is better than any other share currently on the ASX - by a very long way. Like every other person with very little knowledge of how the Australian share market operates, I have no real understanding of how share prices are set and why they change but I would have thought that a company that has a market value of 2/3 of its announced and confirmed annual gross profit is something that has never been seen before - though I would re-iterate that my knowledge of the Australian share market is slim/slight/non-existent. It was such a bargain that after resisting the temptation to buy shares in TPG several times over the past few months I couldn't resist any longer when they reached 10 cents and just had to buy some. At today's TPG share prices David Teoh could buy up the 61% of the company he doesn't already own for less than $A40 million (a bargain based on the fact that the dividend that he would receive on this year's results would be around that value) which would also leave him with $A110 million 'change' from the $A150 million he was paid in cash when he sold TPG into the merged entity (as well as receiving almost 40% of the shares in the newly created company). So what does all this mean? I have no idea. What I completely fail to understand is why does a company like Macquarie Telecom, who as far as I can see (based on their public statements) has no hope of making a profit in this or any other year have shares changing hands at 12 times the price of TPG? and their share price has fallen less than 10% over the same period that TPG's has dived over 80%? No profits made in the past, falling revenue, no profits forecast for the future, and an obsolete product/marketing strategy - yet - yet - they aren't being sold down to the floor like TPG has been - they are almost the same price now as a year ago which means they have massively outperformed the market generally. Someone (obviously a multitude of people) clearly know(s) something that I am missing completely. I guess I will keep buying TPG shares for as long as they stay below 10 cents because, well, I can't think of a downside. Perhaps the announced profits won't actually happen (I guess from the fact the shares are not being snapped up by TPG employees there could be some doubt about that) - but TPG will issue a revision to its current year profit guidance if the board believes the current guidance is wrong. Even if TPG's final profit for the current calendar year is only half what the company currently states then the dividend would likely exceed the price paid for the shares at today's prices. And with 5 months already completed you would have thought that TPG would have already announced a revision if things weren't tracking to their previously announced predictions. I never thought I would 'invest' (perhaps 'gamble' is a more appropriate word) money in an Australian communications company other than Exetel, particularly one that in other circumstances could be regarded as a competitor, but the likely return versus what I can see of the likely risks make it both affordable to take a 100% loss if that comes to pass. I suppose I'm also amused in some perverse way to think that I can buy on today's market the same shareholding I was 'promised' in TPG in the late 1990s for a 50th of the profit I made out of the shares I was subsequently given in the company I went to consult for after TPG; for whom I did the same consulting job as I did for TPG (for more than double the consulting fee). I suppose it's even stranger to actually want a 'competitor' to succeed in their planned revenue/profit endeavours - but I'm pretty sure there is no conflict of interest - just a gamble on what looks like a bargain for a relatively trivial amount of money - and quite possibly no worse a decision than buying CBA, ANZ, NAB and WBC shares based on today's and the immediate future's likely performance. Life is strange.
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After reading your comments, I did a quick search on SOT and found this recent report:
http://news.theage.com.au/business/sp-telemedia-reports-full-year-loss-20080923-4m5l.html It shows they are reporting Revenues of $446 million and projecting EBITDA of $93 million. Last year they made a loss, but there is no indication in this article that they will make a profit in 2009 - I suppose that will depend upon their interest, tax, depreciation and amortisation figures (I have not chunked down to look at them yet). Thanks for the "tip". Harry. Comments (2)
Thanks for the reference Harry - I'll add it to the main entry.
The predicted 93 million profit is for the current financial year ending 30/6/09. Comments (3)
More info from their Sep 08 briefing papers:
projections for 09: NPAT is $16 million (roughly 2.4 cents per share) Capex is $29 million Free cashflow is $58 million Other sources indicate DPS of 1.3 cents per share. Comments (2)
Interesting comments John.
The company has re-iterated several times it is on track to make circa 93 million for the year, with Aug at 7.7 million disclosed on th asx. Also it would be fair to say, given the level of increasing subscribers each month at high levels, owning their own network + offshore backoffice keeping costs down, the profits should conitnue to grow each month. Does tpg allow users like extel to use its network? Comment (1)
If you mean do they wholesale their network? - I don't know of any statement from TPG to indicate that they do/are planning to.
Comments (3)
TPG have certainly come a long way since the early '90s when I (and my then employer) was regularly purchasing computers and peripheral devices from them for the world of Academia from their Talavera road offices. TPG after all used to mean Total Peripherals Group.
I think somewhere in the shed I still have one of their own brand 386SX laptops - dubbed the exploding laptop because the keyboard readily fell off at the slightest jarring. Back in the dialup days they were brave enough to set up a dialup pool in Brewarrina - I think this was despite the introduction of 0198 regional call numbers which made investing in regional POPs a dicey call. Their dialup service was generally pretty good back then, but (I think) due to the way they handled RADIUS traffic it was often difficult to connect as the links were often too slow or saturated for the UDP radius packets to traverse their backhaul in time - resulting in the need to redial many times to connect. Some ISPs still have that issue today! (Including my own if I accidentally saturate the ADSL link - bad practice I know!) I think they've got a few years up on Exetel, and are probably one of the three closest competitors in value for money ADSL. Cheers, Mike Comment (1)
You really can't see how owning shares in a direct competitor to your own company might not be perceived as a conflict of interest?
Comment (1)
No - I can't.
I think it is a miniscule personal investment based on a perverse sense of humour. As I've "declared my interests" to my fellow shareholders and directors I don't see it as anything but an amusing aberration. Comments (3)
The math on calculating the theoretical true or 'intrinsic' value of a share price is quite straight forward. The tricky bit is having to estimate the performance/growth of a company over the short to medium term. This site describes the math pretty well (using the earnings model):
http://www.moneychimp.com/articles/finworks/fmvaluation.htm (searching google for 'intrinsic value of shares' comes up with some good results) You might want to have a go at pricing TPG! What will be interesting to see is at 10c a share, what is the market expecting TPG to grow at (or contract at). Or more scarily, what rate of return is the market expecting to receive to offset the risk in investing in TPG! Comment (1)
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