Company Valuation And Analysis Report For Total Peripherals Group (TPG)

Company Overview

1. Company Overview

Total Peripherals Group (TPG) was inaugurated in 1986 and is Australia (TPG, 2017). Total Peripherals Group (TPG) operates in telecommunication and IT industry with strong customer based in Personal, Small business and large corporations.TPG is second largest provider of internet service in Australia with more than 1500 employees. Total Peripherals Group (TPG) is listed at Australian Stock Exchange with stock exchange code of TPM (TPG, 2017). TPG also owns end-to-end networking infrastructure that increases the quality and coverage. TPG operates in three main business segments that include iiNet, corporate and TPG consumer (TPG Annual Reports 2016). 

1. Growth prospects of TPG

  Total Peripherals Group (TPG) is growing and profitable firm from the first year of incorporation. In 2010, TPG fully acquired the PIPE networks with the consent of shareholders and other related bodies. TPG acquired PIPE network with scheme arrangements for $373 Million. In 2011, TPG announced its interest to fully acquire IntraPower for $13 Million and acquisition process was completed in August (Computer World News, 2011). IntraPower allowed TPG to get control of trusted cloud. After two years of acquisition of IntraPower, in December 2013, TPG acquired AAPT from Telecom NZ at cost of $450 Million (Reuters, 2013). In 2015, the most important step taken by TGP owners to purchase largest ISP named iiNet for $1.4 Billion. Apart from these acquisition, TGP initiated acquisitions of many other small and medium businesses. These acquisitions clearly states that TGP is pursuing stable growth strategy due to increase in profit and operations internationally.

In order to get insights into the growth prospects of TGP analysis of financial statements is very helpful. TGP financial statements followed increasing trend in revenue, assets and net income. Horizontal and vertical analysis of financial statements is given below to understand the growth trend of TGP.

	Horizontal Analysis
	2014-07 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2015-07	2016-07	Growth	Growth
Particulars
Assets
Current assets
Cash
Cash and cash equivalents	24	24	39	0%	63%
Short-term investments	99	152	144	54%	-5%
Total cash	123	175	184	42%	5%
Receivables	86	64	145	-26%	127%
Inventories	5	12	24	140%	100%
Prepaid expenses	21	18	28	-14%	56%
Other current assets	-13	-15	-22	15%	47%
Total current assets	221	254	359	15%	41%
Non-current assets
Property, plant and equipment
Gross property, plant and equipment	1108	2065	2943	86%	43%
Accumulated Depreciation		-879	-1153		31%
Net property, plant and equipment	1108	1186	1790	7%	51%
Equity and other investments	7	116	23	1557%	-80%
Goodwill	1098	1092	3822	-1%	250%
Intangible assets	326	279	1148	-14%	311%
Other long-term assets	-1252	-1272	-3371	2%	165%
Total non-current assets	1288	1400	3412	9%	144%
Total assets	1509	1654	3771	10%	128%
Liabilities and stockholders’ equity
Liabilities
Current liabilities
Capital leases	0	0	54	0%
Accounts payable	125	153	424	22%	177%
Deferred income taxes	34	25		-26%	-100%
Deferred revenues	158	125	285	-21%	128%
Other current liabilities	-60	-45	-250	-25%	456%
Total current liabilities	258	258	514	0%	99%
Non-current liabilities
Long-term debt	693	655	2632	-5%	302%
Capital leases	0		69
Deferred taxes liabilities	36	34	125	-6%	268%
Other long-term liabilities	-311	-297	-1338	-5%	351%
Total non-current liabilities	419	392	1488	-6%	280%
Total liabilities	677	651	2002	-4%	208%
Stockholders’ equity
Common stock	517	517	1052	0%	103%
Retained earnings	267	410	681	54%	66%
Accumulated other comprehensive income	48	76	36	58%	-53%
Total stockholders’ equity	832	1003	1769	21%	76%
Total liabilities and stockholders’ equity	1509	1654	3771	10%	128%

Above table shows horizontal analysis of balance sheet which clearly states that TGP is growing and profitable firm. Income statement of TGP also shows positive growth trend in revenue and net income. Following table shows the growth trend of income statement of TGP.

	Horizontal Analysis
	2014-07	2015-07	2016-07	Growth	Growth
Particulars
Revenue	971	1271	2388	30.90%	87.88%
Gross profit	971	1271	2388	30.90%	87.88%
Operating expenses
Sales, General and administrative	207	278	547	34.30%	96.76%
Other operating expenses	510	657	1278	28.82%	94.52%
Total operating expenses	718	936	1825	30.36%	94.98%
Operating income	253	335	563	32.41%	68.06%
Interest Expense	22	42	169	90.91%	302.38%
Other income (expense)	262	345	634	31.68%	83.77%
Income before taxes	494	638	1028	29.15%	61.13%
Provision for income taxes	322	414	644	28.57%	55.56%
Net income from continuing operations	172	224	385	30.23%	71.88%
Other			-5
Net income	172	224	380	30.23%	69.64%

From 2014 to 2015, revenue increase by 30% while from 2015 to 2016 revenue growth reached to above 87%. Net income increased by 30% in 2015 and about 70% in 2016 due to stable operating expenses. Dedicated top level management, hostile takeover of small companies and latest technology is strength of TPG. Weakness of TPG is risky capital structure with more debt that can increase the chances of bankruptcy and fear among investors. Growing trend of using internet among small and medium enterprises is opportunity for TPG to increase customer base in Australia and other countries. Due to more profits and growing demand of internet, many new competitors can enter into telecom industry which is threat for TPG. In order to avoid threat of new entrants, TPG should devise new strategies and provide latest and cheaper system solutions to its individual and corporate clients.

1. Financial Ratio Analysis

Financial statements are very necessary for public limited companies because these statements are major sources of information for investors, government, creditors, tax authorities and customer (Barth, 2006). Every users of financial statement use financial data to analyze the attractiveness of the firm. Although financial statement is prepared on standard method but it contains very difficult information which is not easy to understand. Financial ratios are used to analyze the information of financial statements (Lewellen, 2004). Five major categories of financial ratios are used to analyze the financial health and performance of TPG. Liquidity ratios, capital structure ratios, asset management efficiency, profitability and market value ratios will be looked into to understand the health of TPG. Liquidity position of TPG is below industry average because firm has more current liability as compared t current assets. Working capital of TPG is negative and this will create difficult situation to repay short-term obligations (Padachi, 2006). As discussed in SWOT analysis that capital structure of TPG contain more debt compared to equity which can lead to risk of bankruptcy. Debt to equity ratios of TPG is well below industry average because TPG has more debt than industry. Interest coverage ratio is also below telecom industry which is 20. Interest coverage ratio shows the ability of firm to pay its interest and it must be 20 times to avoid risk of bankruptcy. Efficiency ratios show the ability of firm to generate revenue through use of assets available to the firm.  Net asset turnover ratio is very attractive because TPG is effective and efficient in utilizing firm’s assets.  Receivables turnover ratio shows the ability of firm to collects outstanding receivables and receivables turnover is above industry average. Operating profit margin is well above the industry average. Price to earnings ratio is also above industry average due to future growth prospects.

Growth Prospects for the Company

Liquidity Ratios
	Jul-14	Jul-15	Jul-16
Current Ratio
Current Assets	221	254	359
Current Liabilities	258	258	514
Current Assets /Current Liabilities	0.857	0.984	0.698
Acid Test Ratio
Current Assets	221	254	359
Inventory	5	12	24
Current Liabilities	258	258	514
Current Assets – Inventory/Current Liabilities	0.837	0.938	0.652
Capital Structure Ratios
Debt to Equity ratios
Total Debt	677	651	2002
Total Equity	832	1003	1769
Total Debt/Total Equity	0.814	0.649	1.132
Gearing Ratio
Total Long term liability	419	392	1488
Equity	832	1003	1769
Long Term Liability	419	392	1488
Capital Employed (Equity + Long Term Liability)	1251	1395	3257
Total Long term liability/ Capital Employed	0.335	0.281	0.457
Interest Coverage Ratio
PBIT	253	335	563
Interest Expense	22	42	169
PBIT/Interest Expense	11.500	7.976	3.331
Efficiency Ratios
Net Assets Turnover Ratio
Revenue	971	1271	2388
Equity	832	1003	1769
Long Term Liability	419	392	1488
Capital Employed (Equity + Long Term Liability)	1251	1395	3257
Revenue/ Capital Employed	0.776	0.911	0.733
Receivables Turnover
Receivables	86	64	145
Revenue	971	1271	2388
Receivables *365/Revenue	32.327	18.379	22.163
Fixed Asset Turnover
Sales	971	1271	2388
Net Fixed Assets	1288	1400	3412
Sales/Net Fixed Assets	0.753882	0.907857	0.699883
Total Assets Turnover
Sales	971	1271	2388
Total Assets	1509	1654	3771
Sales / Total Assets	0.643472	0.76844	0.633254
Profitability
Gross Margin
Gross profit	971	1271	2388
Revenue	971	1271	2388
Gross profit x 100/ Sales	100.000	100.000	100.000
Operating Profit Margin
Operating Profit	253	335	563
Revenue	971	1271	2388
Operating Profit / Revenue	0.2606	0.2636	0.2358
Net Profit Margin	`
Net Income	172	224	380
Revenue	971	1271	2388
Net Income/Revenue	0.177	0.176	0.159
Investment Ratios
Dividend Yield
Dividend	0.12	0.14	0.18
Market value of shares	5.42	9.34	12.61
Dividend*100 /Market Value of share	0.0221	0.0150	0.0143
Earnings per share (EPS)
Profit After Tax	172	224	380
Shares Outstanding	1616	1616	1706
Profit After Tax / Shares Outstanding	0.106	0.139	0.223
Price/earnings ratio
Share Price	5.42	9.34	12.61
Earnings per share (EPS)	0.106436	0.138614	0.222743
Share price/Earnings Per Share	50.923	67.381	56.612

Risk and return

In a competitive market risk is directly associated with return (Cochrane, 2005). Higher risk always yields higher return if information is symmetric. Investor use share prices to calculate the risk and return trend of stock and invest if risk is lower than return. TPG is publicly traded firm and its share prices history can be used to calculate the risk-return tradeoff. There are different methods to determine risk and return of any stock and in this report mean-variance approach is used to calculate risk and return of the TPG stock. Risk can be categorized as individual or market risk (Dohmen, et.al, 2011). Individual risk is risk associated with particular stock while market risk is difficult to mitigate as it is associated with macro-economic factors. 3 years price data is utilized to calculate the risk and return of TPG which is give in table below.

Month	Monthly Prices (x)	Mean (x¯)	Monthly Prices (x)	Mean (x¯)	(x- x¯)	(x- x¯)2
31/12/2016	6.7		6.7	8.41	-1.71	2.94
30/11/2016	7.02		7.02	8.41	-1.39	1.95
31/10/2016	7.43		7.43	8.41	-0.98	0.97
30/9/2016	8.47		8.47	8.41	0.06	0.00
31/8/2016	11.98		11.98	8.41	3.57	12.71
29/7/2016	12.61		12.61	8.41	4.20	17.60
30/6/2016	11.69		11.69	8.41	3.28	10.73
31/5/2016	12.1		12.1	8.41	3.69	13.58
29/4/2016	10.52		10.52	8.41	2.11	4.43
31/3/2016	11.14		11.14	8.41	2.73	7.43
29/2/2016	10.32		10.32	8.41	1.91	3.63
29/1/2016	9.87		9.87	8.41	1.46	2.12
31/12/2015	9.72		9.72	8.41	1.31	1.70
30/11/2015	10.15		10.15	8.41	1.74	3.01
30/10/2015	10.87		10.87	8.41	2.46	6.03
30/9/2015	10.67		10.67	8.41	2.26	5.09
31/8/2015	9.23		9.23	8.41	0.82	0.66
31/7/2015	9.34		9.34	8.41	0.93	0.86
31/6/2015	8.81		8.81	8.41	0.40	0.16
29/5/2015	8.88		8.88	8.41	0.47	0.22
30/4/2015	8.78		8.78	8.41	0.37	0.13
31/3/2015	9.01		9.01	8.41	0.60	0.35
27/2/2015	7.49		7.49	8.41	-0.92	0.86
30/1/2015	6.58		6.58	8.41	-1.83	3.37
31/12/2014	6.63		6.63	8.41	-1.78	3.19
28/11/2014	7.28		7.28	8.41	-1.13	1.29
31/10/2014	7.13		7.13	8.41	-1.28	1.65
30/9/2014	6.72		6.72	8.41	-1.69	2.87
29/8/2014	5.92		5.92	8.41	-2.49	6.22
31/7/2014	5.42		5.42	8.41	-2.99	8.97
30/6/2014	5.41		5.41	8.41	-3.00	9.03
30/5/2014	5.85		5.85	8.41	-2.56	6.58
30/4/2014	5.84		5.84	8.41	-2.57	6.63
31/3/2014	6.53		6.53	8.41	-1.88	3.55
28/2/2014	5.51		5.51	8.41	-2.90	8.44
31/1/2014	5.31		5.31	8.41	-3.10	9.64
Mean		8.415
Variance						4.682
Standard Deviation(Risk)						2.164

Beta (β) of TPG

Beta coefficient is measure of systematic risk which can be calculated using Capital Asset Pricing Model CAPM) (Galagedera, 2007). In order to calculate Beta (β), expected return on particular stock, expected return on market and risk free rate are necessary. Expected return is same which is calculated in above section, market return is obtained from Australian index and risk free rate is obtained from Bloomberg (.

 Beta Need To Find

Expected Return 0.08415

Risk Free Return 2.47%

Expected Market Return 7.79%

Formula of CAPM  

E(R) =R f + β { E ( R m) – R f}

Rearrange the formula to get beta

β (TPG) =(ER – Rf) / (E (R m) – R f)

  = 1.117

1. Weighted Average Cost of Capital (WACC)

Weighted average cost of capital or WACC is discount rate which is average of costs of all sources of finances that is used by the firm (Farber, et.al, 2006). WACC is very reliable and is used in all valuation methods. Projects of firms are also evaluated using WACC due to its reliability and validity. Given below is the calculation of WACC of TPG (Fernandez, 2007).

Data

Value of Debt Vd 2,002,000,000

Weight of Debt Wd 53.09%

Cost of debt Kd 8.44%  

Tax Rate st 62.59%

 Value of Common Stock Vcs 1,769,000,000

Cost of common Stock Kcs 8.415%

Weight of Common Stock Wcs 46.91%

Value of Firm Vf  $3,771,000,000.00 

Formula of WACC

WACC = (Wcs* Kcs) +  (Wd * Kd(1-T))

= 5.624%   

1. Discounted Cash Flow (DCF) analysis and valuation

Growth Forecast			0.5	0.4	0.4	0.2	0.02	TV
(Data In Mn)	2015.0	2016.0	2017.0	2018.0	2019.0	2020.0	2021.0
Revenue	1271.0	2388.0	3582.0	5014.8	7020.7	8424.9	8593.4
Operating Cost	936.0	1825.0	2098.8	2413.6	2654.9	2920.4	3066.4
	335.0	563.0	1483.3	2601.2	4365.8	5504.5	5526.9
Taxes	414.0	644.0	928.4	1628.1	2732.6	3445.2	3459.3
Net Investment	308.0	562.0	597.8	698.1	908.7	993.0	1078.9
Change in WC	-4.0	-155.0	100.0	50.0	30.0	40.0	60.0
FCF	-383.0	-488.0	-142.9	225.0	694.5	1026.2	928.7	28189.2
WACC		0.1	0.1	0.1	0.1	0.1	0.1	0.1
Years			1.0	2.0	3.0	4.0	5.0	5.0
Denominator		1.1	1.1	1.1	1.2	1.2	1.3	1.3
PV of FCF		-462.0	-135.3	201.7	589.4	824.5	706.4	21442.2
Enterprise Value								23166.8
Shares Outstanding								1,706
Fair Value								13.58

1. Buy, Sell or Hold Recommendation

Based on the discounted cash flow technique, it is recommended that investors should invest or buy shares of TPG because it is undervalued. Behavior finance claims that all stock return to intrinsic value after interaction of demand and supply (Chan, et.al, 2001). Current share price of TPG is AUD5.95 while Discounted Cash Flow analysis revealed fair value equal to AUD13.579. Therefore investors should invest in TPG because it is undervalue stock and when it return to fair value, investors will earn about AUD 7.6 

References

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Reuters., (2013) TPG Telecom preferred bidder for AAPT: source. From the official website of TPG. Data retrieved from https://www.reuters.com/article/us-aapt-tpg-idUSTRE6451N220100506

Computer World News., (2011) TPG to acquire IntraPower. From the official website of Computer World News. Data retrieved from  https://www.computerworld.com.au/article/393570/tpg_acquire_intrapower/

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