Pinned straw:
@mikebrisy and @Rocket6 , I'm interested in how you are valuing the Business / Enterprise & Govt revenue potential for ABB.
Do you see this coming from reselling core connectivity eg. NBN Enterprise Ethernet product or Value Added Services on top of the line (eg. IP PBX, Managed Routers etc.)?
My long term hypothesis is that ABB is one of the primary recipients of a tax payer subsidised destruction of the Telecommunications Monopoloy/Duopoloy in Australia. AKA NBN. I also believe that TPG will be a major beneficiary as well and will occupy the "value space" vs "premium service space" taken by ABB. With Telstra being a loser as their monopoly is broken down (structural separation etc. but subiidised with an $11B cheque from NBNCo). I also suspect Optus will be a loser in this transition by being stuck in the middle (not having a clear differentiated proposition like ABB or TPG) as well as being hampered by things such as their Data Breach and foreign ownership.
Your models seem to be based mainly upon residential NBN. I worry that much of the easy growth from consumer NBN is probably done (rollout complete, pressures of bigger Telcos selling 4G/5G Fixed Wireless Broadband to undercut NBN's lower speed tiers, limited growth in SIOs (basically new dwellings approvals at about13,000 builds a month at the moment so 1-2% organic NBN growth and an increase in some of the NBN Access charges for Telcos pressuring margins). While I think ABB can probably still take market share in this space as they have built a good reputation as a company providing great service in a generally mediocre industry, there is still quite a bit of inertia to force change now that NBN rollout isn't forcing people to conduct a once in a lifetime review of their relationship with Telstra.
So from here on in, I'm hoping that further growth is going to come from the Business and Enterprise and Government segments:
- These are coming off a very low base
- However, they seem to offer higher Gross Margin (45-50%) vs 30% for the Residential and Wholesale segments.
- They don't seem to be growing this revenue at a meaningful rate yet (7-9%) vs 23% for Residential (albeit this rate is declining every half) but I'm wondering if this is because the service offering is still so new or whether ABB does not have a sales force sufficiently skilled to address these more complex customers.
There is some sense that with the products from NBNCo for Business and Government (such as Enterprise Ethernet) launching to market much later and potentially some longer term contracts also protecting incumbents its still very early to make a prediction.
- I note that ABB seems to be taking a larger share of Enterprise Ethernet SIOs than their share of Residential Customers:https://www.crn.com.au/news/aussie-broadband-nabs-15-percent-of-nbn-enterprise-orders-575388. (I'm not sure if this is still the case as this information doesn't seem to be published)
- I note that Enterprise revenue for NBNCo is increasing quite rapidly. According to TPG in their ACCC submission https://www.accc.gov.au/system/files/TPG%20-%20Submission%20to%20ACCC%20consultation%20paper%20-%20Public%20version.pdf "For instance, NBN Co reported on 9 August 2022 ‘business segment’ revenue of $1B, which is up 20% year on year. On 15 February 2023, it reported revenue from ‘business customers’ increased to $549 million in HY23, up 11 per cent from $493 in HY22. It has predicted take-up of enterprise ethernet services will grow “rapidly”. TPG and other incumbents with large fibre footprint hate that NBN has gone beyond its initial mandate or residential access.
- NBN themselves think that there is potential for lots of Enterprise Ethernet (and this is really only just beginning) with potential for 318K services in non-metro alone. "The Company’s enhanced Enterprise Ethernet service is enabling eligible business customers to order broadband based on wholesale speed tiers of close to 10 Gbps1,2, which is up to 10 times faster than previously available on the nbn® network. We now have over 20,000 active Enterprise Ethernet services, with 6,000 additional services activated during the half. nbn® Enterprise Ethernet is available through RSPs to NBN Co's existing Enterprise Ethernet footprint, including around 900,000 premises located in nbn® Business Fibre Zones across Australia. Of the 321 Business Fibre Zones, 142 are located in regional Australia, enabling approximately 318,000 businesses to access Enterprise Ethernet in non-metropolitan areas". https://www.nbnco.com.au/content/dam/nbn/documents/about-nbn/reports/financial-reports/NBN-Co-Half-Year-Report-FY23.pdf.coredownload.pdf
I'm not sure whether modelling ABB's growth in Enterprise Ethernet as the core of the Enterprise and Government Revenue is the way to go or whether we should be assuming a greater mix of value added services on top of the core connectivity
- Telstra seems to be starting to see a decline in their Enterprise and Government fixed line revenue but they seem to be trying to offset that by going further up the stack with NAS (Networks and Services). According to Telstra data the liones share of their revenue is coming from the NAS. https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-h/TLS23_17%20Results%20for%20FY23.pdf
I'd appreciate your thoughts. My gut wants to buy some more ABB but my head and DCF which is based upon residential broadband to date is telling me that the stock is currently priced about right unless they can crack Enterprise and government. I'm a bit scared by the rate of decay of net adds per half compared with the install base in the green chart above (2HFY22 10.2%, 1HFY23 6.4%, 2HFY23 5.5%, ...)
DISC: Hold TPG IRL and ABB IRL and Strawman
mikebrisy
@RhinoInvestor there is a lot in your question, and I will consider it more deeply when I do my model update.
But the quick answer is that my investment thesis is that $ABB will continue to grow strongly in resi to and beyond their targets (albeit at a slowing rate), driven by the brand value and a continued focus on offering a differentiated customer service, focused on the higher value plans. I actually get them achieving between 12-14% share of overall connections market by 2032 - my final explicit year. In terms of number of connections that's driven by resi. That's kind of the base.
What really differentiates my scenarios is their success in Business and E&G, supported by the targeted fibre backbone they've laid in the capital cities which allows then to capture more of the customer value.
In business, it is instructive to go back to their Market Day presentation last year. This lays out the services on offer: high-speed broadband connection (incl. hardware), Voice/VOIP (including hardware to support), private cloud and security, and mobile.
In my higher value cases (which gets to valuation of over $5.00/share, subject to updating) by 2027 I have 40% of revenue coming from B+E+G+W and this increases over time to 2032 to 44% in my high scenario. But share of Gross Margin from BEG&W grows to 53% by 2032. Note that's the upside case.
I think their strategy is clear both from the fibre they've laid and Phil's focus at the last call. I haven't reconciled their trajectory in business over the last year against my different scenarios. That's on the to do list.
So in summary, they're starting in my model as a majority resi business but by the end of it most of the value lies in BEG&W.
As I said, there is a lot in your question to consider. In truth it gets into more detail than I've evaluated, so I will think further about this when I do my update.
The funny thing about my investment in ABB is that I first bought it almost a year ago when the SP was languishing around $2.30, and I was interested in the value of the brand. So when I built my first model I couldn't get any reasonable valuation below $3.00 (worst case), so I had to buy it. I didn't intend for it to be a long term investment, as I don't like the sector, but I could see a 2-3 year very lucrative play because it had become so undervalued. After the Market Day, I did more work and got a better feeling for this business and realised the strength of the fibre they are laying, as well as the brand. So actually, now I can see it as a long term winner. Its bothered me because I still don't like the sector and have resisted increasing my RL position beyond its current 3.8%. However, it is now one of my higher conviction holdings and if it keeps performing then, on SP weakness I would probably increase my holding. In fact the only reason I haven't after these results is that there were some higher priorities on my shpping list.
Still, in a market when you have a dominant incumbent like $TLS that is slowly seeing its business being eroded - particularly from the high value ends - you have to consider what a competitive response might look like especially as $ABB gets bigger, so I don't want to get to wedded to the story. All that said, I enjoyed watching the $TLS results call and seeing the evidence of where they are losing!
RhinoInvestor
@mikebrisy Thanks for your consideration ... I likewise dollar cost averaged in through Q4 CY22 and have an average purchase price of $2.39 (and agree at the time the stock was oversold).
I'm now up 48% in a year and just hitting the first of the milestones where a portion of my holdings get the Capital Gains Tax discount so am trying to ascertain whether I invest more (add to your winners) or take profits. (there is also the middle option of do nothing as well which is often the wisest).
My inclination is that they are currently fairly valued on the basis of their residential business alone. The PE of 39x is pretty high (compared with Telstra 23.6, TPG 26.8 and Singtel 18.3) but the P/S ratio of 1.08 is substantially lower (all the others around 2x).
Looking at the Residential business now, it should be good margin and cashflow from here with the cost of backhaul and infrastructure in the NBN PoIs are all now sunk costs. Its a matter of making a margin (using a 50/20 service example) between the $79/month that the consumer pays and the $45 that NBN charges for a TC4 + CVC bundle (while playing with CVC charges to ensure an improved peak time experience). Apparently the CVC charges are supposed to get phased out by NBNCo over coming years.
This means the better part of $408 per service per annum (revenue after NBN costs) out of which ABB needs to maintain its network, its service desk and its corporate overheads and fund residential customer acquisition. To that end, I'd think there should be good earnings dropping to the bottom line from Residential from here on. I think that hypothesis is playing out in the increases of their Gross Margin and Operating Cash Flow and the large increase in Free Cash Flow that should afford them the ability to pay down some of the 401m liabilities on their balance sheet. I'm just not as certain about their ability to grow the top line.
My big question is whether their plans to allocate capital towards the E&G space will play out the way that their residential play has. There is certainly good money to be made there looking at Telstra's revenue as a good indication of the TAM.
If ABB were trading closer to $3 like they were a month ago I think I'd be adding to my position now.
DISC: I also don't like the sector either (although I used to work in it a few years back). I only own ABB, TPG and China Mobile (941.HKG where my hypothesis was that they had already incurred most of their 5G rollout expenditure and so were in the phase of just milking the asset). ABB is doing the best over the last 12 months.
https://www.nbnco.com.au/content/dam/nbn/documents/sell/wba/2023/sfaa-nbn-smart-places-price-list-20230307.pdf.coredownload.pdf
https://www.accc.gov.au/system/files/NBN%20Co%20-%20SAU%20supporting%20submission%20-%20Pricing%20and%20price%20controls%20-%202%20December%202022.pdf
