Company Overview: Aussie Broadband Limited (ASX: ABB) provides Internet and other telecommunication services in Australia. It caters to business and residential segments and provides private Internet protocol (IP) networks, managed service provider (MSP) partner program, hosted firewall, hosted private branch exchange (PBX) phones, session initiation protocol (SIP) trunks and many others. The company was listed on ASX in October 2020.

ABB Details

Telecommunication Game Changer with Organic & Inorganic Growth: The company aims to grow exponentially and increase its market share by direct customer sourcing through marketing and white label partnerships.

Segment Fragmentation:

• Business Segment: Having a strong increase in the business segment, ABB has taken ~15% of all NBN enterprise ethernet net service activation orders so far and has more than ~10,000 active services and over 400 MSPs (Managed Service Providers) onboarded. The total segment witnessed a growth of ~13% Q-o-Q and ~67% Y-o-Y and net addition of 5,348 in its broadband connections.
• Residential Segment: Despite fall in the residential sales due to the Christmas season, the total segment witnessed a modest ~6% Q-o-Q and ~35% Y-o-Y growth in its broadband connections, and a total of 25,582 broadband additions for the 2Q.
• Wholesale & White Label Broadband: Net additions for the 2Q were reported as 17,826 (~188% Q-o-Q and ~1403% Y-o-Y growth) arising from 8,725 of migrated White Label Customers and remaining 9,101 from the organic growth services. The remaining migrations from the anticipated 20k is expected to happen in 3QFY22.

FY21 Segment Top & Bottom-Line Highlights (Source: Analysis by Kalkine Group)

Glancing over 2QFY22:

The company is moving towards an optimistic future, which can be seen in its 2QFY22 performance:

• Sell-Side: Even after the fall in the residential sales due to the Christmas season, the company’s overall broadband connections increased over ~11% Q-o-Q and witnessed a ~13% Q-o-Q increase in its business broadband connections.
• Revenue Hiking: The overall hike in the business led to ~11% Q-o-Q increase in its revenue in 2Q. The gross revenue increased by ~$49% Y-o-Y to ~$273.3 million in 1HFY22 versus ~$159.6 million in 1HFY21.
• Promotional Overheads: Due to a heavy increase in its Advertising & Marketing expenses and promotional costs (aka Customer Acquisition Cost (CAC)) and Connectivity Virtual Circuit (CVC) expenses, its EBITDA got impacted. Marketing costs as a percentage of revenue increased to ~12.6% in 1HFY22 versus ~11.9% in 1HFY21.
• FY21 Balance Sheet Items: Along with the reduction in debt from ~$38.8 million to ~$10.6 million in FY21, the company ended its FY21 with the cash and cash equivalents as of 30^th June 2021 of ~$57.01 million versus ~$21.44 million as of 30^th June 2020.

Acquisitions & Migrations:

• OTW Acquisition: On 2^nd December 2021, ABB entered in a Scheme Implementation Deed (SID) to acquire 100% share capital of OTW (Over the Wire Holdings Limited), which is approved by ASIC. The next meeting to get authorised by Federal Government is scheduled for March 2022.

      a) The annual cost synergies it expects - comes between ~$8.0 - ~12.0 million within three years.

      b) The acquisition will be EPS accretive on a pre and post synergy pro-forma statutory FY21 basis.

      c) With the ongoing capital expenditure savings and significant merger of skills and products capabilities, OTW confirms an EBITDA of ~$33.0 million for its FY22 guidance.

• White Label Services Migration: The second quarter remained strong and was boosted the migration of white label’s customers migrating to the ABB network. It showed organic growth of 9,000 new white label customers and 8,725 migrations of existing services.

Top 10 Shareholders: The top 10 shareholders together form around 48.25% of the total shareholding, while the top 2 constitute the maximum holding. Reisinger (John) and Britt (Phillip) are holding a maximum stake in the company at ~8.02% each, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company has more than doubled its current ratio from last year at 0.53x to 1.57x in FY21. Gross margin also increased by ~4% from ~24% in FY20 to ~28% in FY21.

Liquidity Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors and their mitigations:

1. Technology Risk: The Telco business is quite dependent on the technology it applies, and hence, failure of regular upgradation and improvement might affect the shift in the usage and customer retention.
2. Acquisition Risk: The company’s focus is to grow organically and inorganically, where non-impactful and non-efficient mergers might cause risks and declinations.
3. Competitive Edge: Due to the changes in customers’ preferences and sentiments and multiple market players, ABB has a perpetual challenge to gain a competitive edge through its meaningful operations.
4. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company can get impacted by the lockdown regulations, which might affect its sales.

Outlook Dependable: The below-mentioned outlook will be probable because of the following drivers: 

• Successful completion of 100% acquisition of OTW (Over the Wire Holdings Limited) shares.
• Reduction in its % of employee and administration costs with respect to revenue to gain the margin the company wishes for.
• Completion of white label connection migration.
• Good balance of marketing expenditure and its benefits in customer acquisition for the next coming second half.

Outlook: With the reduction in lockdowns and in expectation of a hopeful future, the company’s outlook depends a lot on the marketing spend and its competitive edge. The company is in anticipation of:

• Keeping the un-audited accounts in mind, the company expects its EBITDA for half-year 2022 to be ~$9.0 million (excluding the OTW acquisition costs) and ~$27 - ~$30 million for full financial 2022 year.
• Its broadband net additions to increase by ~85,000 – 95,000 in 2HFY22 (including white label services migration) and total active connections to be in the range of ~580,000 – ~590,000.

ABB will announce its first-half 2022 results on 21^st February 2022 and, the outlook figures updates will be clearer in its 3QFY22 report, to be released in April 2022.

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: As per ASX, the stock of ABB is trading near its 52-weeks’ average levels of $2.430-$5.660. The stock gave a positive return of ~19.77% in the past six months and a positive return of ~56.94% in the past nine months. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ median multiple, negative ROE, OTW future acquisition, white label migrations planned and increasing promotional costs to gain customers organically. For the purpose of valuation, few peers like Superloop Ltd (ASX: SLC), Spirit Technology Solutions Ltd (ASX: ST1), Telstra Corporation Ltd (ASX: TLS), and others have been considered. Considering the expected OTW synergy, upside potential in valuation, current trading levels, ABB’s market capturing strategy (organically and inorganically), optimistic long-term outlook with decent EBITDA expectations, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $4.29, 01:10 PM (GMT+10), Sydney, Eastern Australia, (as on 15^th February 2022).

ABB Daily Technical Chart, Data Source: REFINITIV

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.

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.

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