Company Overview: Aussie Broadband Limited (ASX: ABB) provides telecommunications services in Australia and is mainly focused on providing NBN services to residential and business segments. It provides NBN subscription plans to its customers, which includes residential homes, small businesses, corporate enterprises and managed service providers, to name a few. It also offers a range of other telecommunications services, which includes VoIP, mobile plans, entertainment bundles through partnerships and connections through the OptiComm network. It was listed on the ASX in October 2020.

ABB Details

Decent Growth in 1HFY21 on the Back of Increase in Broadband Services: Aussie Broadband Limited (ASX: ABB) provides NBN services to residential and business segments. The market capitalisation of the company as on 01 June 2021, stood at ~$472.04 million. As per a recent update, the company has launched a new white-label solution for big retail brands, which allows them to sell ABB's internet and VoIP services under its own brand. It has already signed with its first customer, Origin Energy and expects to transfer more than 25,000 of the customer’s existing broadband and VoIP services to its network. The company has updated that the implementation and onboarding of its key strategic customers have been progressing well.

During H1FY21, the company delivered impressive financial performance, with revenue growth of ~89% to $157.4 million, compared to $83.4 million in the previous corresponding period. The growth has been aided by broadband additions, increased traction in mobile, fetch TV and VoIP, and a surge in retail broadband prices. EBITDA grew by ~87% to $7.3 million, from a level of $7.3 million in the pcp. There has been decent growth in organic connections during the period, in both residential as well business broadband segments. It ended the period with a cash position of $50.4 million as of December 2020, with a debt of $0.5 million on the balance sheet.

Decent Rise in Cash Levels (Source: Analysis by Kalkine Group)

Gain in Market Share: In H1FY21, the company has reported ~30% increase in residential broadband to 313,193 services and business broadband grew by ~49% to 29,441 services since June 2020.  As a result, it has witnessed its market share improve to 4.2%, from a level of 2.8% in December 2019. It also reported a better churn rate than the forecasted figure of 2.1%.

Increasing Trend in Broadband Services (Source: Company Reports)

The company has also witnessed traction in its complementary services with decent growth in single line VoIP owing to increased business customer signups. There has been an improvement in mobile growth also due to competitive plan offerings and increased sales focus.

Progress on The Fibre Project: ABB has been progressing well on the fibre project with 79km fibre in the ground, and 6 data centres, and 7 NBN POIs connected, reflecting 7% of the project completion. The build pipeline is under construction with 150 km of fibre to 8 data centres and 17 POIs. It plans to roll out optic fibre network to 76 nbn POIs and over 20 data centres.

Top 10 Shareholders: The top 10 shareholders together form around 63.96% of the total shareholding, while the top 4 constitute the maximum holding. Reisinger (John) and Britt (Phillip) are holding a maximum stake in the company at 9.43% and 9.43%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improved gross margin performance in H1FY21 at 26.7%, compared to 22.7% in the previous corresponding period. There was an uptick in the operating margin to 2.4%, from 1.7% in the same period under consideration. Net margin stood at a negative 6.6% in H1FY21. Debt to equity ratio stood at 0.25x during the period, compared to an industry median of 0.49x.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The Company’s activities expose it to credit risk, market and liquidity risk. It’s line of business also exposes it to the risk of stiff competition from some reputed peers in the sector. ABB’s operations are also dependent on the Australian Government's NBN rollout plans and other regulatory measures. The industry dynamics is also influenced by the pricing for NBN access, and any material changes to it have the potential to impact the earnings of the company. ABB has also experienced issues with its connection appointment system, which has delayed the re-start of new HFC connections as well as delay in the other connection types. This has resulted in an uptick in work in progress queues over the past few weeks.

Sectoral Overview: There has been an increasing trend for data consumption and demand, which is expected to drive growth and development in the Australian telecommunications industry going forward.  The market is also influenced by a range of secondary factors which drives data consumption and includes population growth, video and audio streaming services, business demand and remote and distributed work. Each of these growth drivers has seen an upsurge in the past few years, validating the prospects of the company.

Outlook: The company has upgraded its full-year EBITDA forecast to be between $17 million and $20 million, excluding IPO costs. The increase in forecast levels is on the back of impressive retail ARPU growth, customer growth in the business segment and NBN promotional rebates. The Fibre rollout process has been shaping well, and it expects to complete 28 to 31 POI and data centre sites by 30 June 2021, with a substantial pipeline of work due for completion in the first half of FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company will release its full-year FY21 results on 30 August 2021. As per ASX, the stock of ABB is trading above its average 52-weeks’ levels of $1.695-$3.300. From the technical analysis standpoint, ABB stock prices are continuously taking support of the rising trend line on the weekly chart. The stock prices are forming a series of higher tops and higher bottoms, which indicates bulls have an upper hand. The momentum oscillator RSI (14-period) is trading at ~54.46 level, which supports the bullish momentum in the stock. An important support level for the stock, is placed at ~$2.44, while key resistance level is placed at ~$3.09. The stock of ABB gave a positive return of ~35% in the past six months and a negative return of ~11.76% in the past one month. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average EV/Sales (NTM trading multiple), considering the lower updated residential connection guidance and issues with the connection appointment system. For this purpose, we have taken peers such as Spirit Technology Solutions Ltd (ASX: ST1), Hubify Ltd (ASX: HFY), 5G Networks Ltd (ASX: 5GN). Considering the expected upside in valuation, impressive financial performance, growth in broadband services, decent progress in Fibre rollout and a strong balance sheet to take on growth opportunities, we recommend a ‘Buy’ rating on the stock at the current market price of $2.70, up by 8.870% as on June 01, 2021.

Note: The purple color line in the chart shows RSI (14-period) and white color line represents trend line. The upper 2 yellow color lines denotes Resistance 1 and Resistance 2, while the lower 2 yellow color lines denotes support 1 and support 2.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV 

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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