FWIW new broker report out from Morgan Stanley (now Overweight PT $5.50)

The report runs 31 pages but here's the front page summary

Can ABB execute on a multi-year earnings expansion strategy? … Yes, we think so

The shares are +15% since 23 February after a strong 1H result. Consensus is that they are now fully priced. We disagree. We see much more to come. Move to OW with PT A$5.50/shr. Here we outline what's driving ABB's high earnings growth vs. peers. We say build positions for multi-year growth

Key Takeaways

• 1HFY24 results were strong, well ahead of consensus
• 2H customer additions + revenue + EBITDA momentum are accelerating
• Strong FCF. Net cash position. We see modest upside to EBITDA margins
• ABB trades at parity with peers TLS and TPG on ~7x one-year forward EBITDA, but we forecast ABB three-year EBITDA CAGR at 15-20% vs. TLS and TPG at ~5%
• Either our ABB earnings estimates ultimately prove wrong...or ABB shares will significantly outperform over the next three years, to close that differential

Australia's telco industry is mature and relatively low growth. We forecast total telco spending to increase at only 1-3% p.a. over the next decade. Experience has taught us: an operator able to gain market share over a sustained period, in a profitable and FCF-positive way, can create meaningful shareholder value. We think ABB ticks the boxes

Three key changes: We initiated on ABB 18 months ago with a bearish view because we saw it as a single-product telco (residential broadband) and purely a "re-seller" of the NBN's services. As such, we saw ABB's future earnings and profit margins as vulnerable to regulatory change and shifts in wholesale prices as dictated by others (e.g., the network owner and regulator). But today we think that bearish thesis no longer holds. Those risks haven't evaporated – but they have diminished

1. Residential broadband business now underpinned by own fibre network: We view this as a game-changer - it puts ABB more in control of its own economics

2. Wholesale broadband business: White-label product is exceeding expectations

3. Enterprise – building a unique disruptor telco business. No legacy revenues to defend. ABB is selling new software/tech (e.g., SD-WAN) to its enterprise customers. We also include recently acquired Symbio in ABB estimates and valuation

DISC: Held in SM & RL

ABB was one of the companies highlighted in todays AFR Fast 100 Special Report

Going big to win most trusted telco

Telco Aussie Broadband is now Australia’s fourth-biggest internet provider, writes Christopher Niesche.

In 2015, Aussie Broadband managing director Phillip Britt had to make a decision – get big or get out. The company, which he had founded in 2003, had carved out a profitable niche providing wireless broadband to regional areas, predominantly in Victoria.

Aussie Broadband was serving homes and businesses that were more than about three or four kilometres from their nearest telephone exchange and so couldn’t get ADSL broadband. It was helped along the way by various government incentives to focus on areas that were underserved for fast internet.

But by 2015, the National Broadband Network (NBN) was being rolled out across the country, including to the regional areas served by Aussie Broadband, leaving the company’s wireless offering uncompetitive.

‘‘We had a decision to make. It was either time to get big or get out,’’ recalls Britt.

The company acquired Brisbane-based telco Over the Wire for $344 million last year and recently announced the purchase of software group Symbio for $262 million.

The latest acquisition comes as Aussie Broadband, which floated three years ago, overtakes the Vocus Group to become Australia’s fourth-biggest internet provider.

Aussie Broadband has by far the highest revenue of any company in the AFR Fast 100 in 2023.

It earned revenue of $350 million in the 2021 financial year and by 2023 revenue had increased to $788 million – a compound annual growth rate of 50 per cent.

Aussie Broadband’s white-label services are designed for big companies such as Origin Energy, which sell telecommunications services under their own brands.

The entrance of the NBN into the market saw Aussie Broadband shift from being a wireless infrastructure owner and builder to ‘‘just another’’ retail service provider over the NBN. It had to find a way to differentiate itself from its large and small rivals.

‘‘We felt there was a huge gap with the way that the big telcos were treating their customers and, I guess coming from the country, we had more of a customer-first kind of approach,’’ Britt says.

‘‘And so we built technologies and systems which allowed us to serve our customers really, really well and do it at a lower cost because I wanted to keep everything onshore, whereas a lot of other telcos were offshoring those roles.’’

The company automated a lot of customer service functions, which allowed it to keep costs down and keep its customer service based in Australia.

‘‘Where that really started to take off was when COVID hit and most of the other big four telcos had offshore operations,’’ he says.

‘‘They were shut down or impacted due to the various lockdowns that happened around the world. But we were able to keep operating because we were predominantly onshore.’’

Days when people were unable to contact their telcos became high sales days for Aussie Broadband.

The decision to get big required a lot more capital, Britt says.

‘‘I’ve nearly gone broke five times over the last 20 years, including as recently as four years ago. It’s been one of those cases that we’ve literally threw everything we had into the business to make it succeed and to grow,’’ he says.

The company debuted on the ASX in October 2020, following a $40 million initial public offering at $1 per share. As of late November this year, its shares were sitting a little under $4 each and the company had a market capitalisation of over $1 billion.

Listing has made capital a lot easier to raise.

Aussie Broadband is Australia’s most trusted telco brand, according to the most recent Roy Morgan Trusted Brand Awards, and Britt says much of its customer growth has been thanks to word of mouth.

‘‘We pull a lot off the big four carriers, particularly Telstra, because people love these services, they love the experience and they trust us,’’ he says.

Speaking in the wake of the Optus network outage in November, Britt said several large corporates have switched their mobile phones to Aussie Broadband, even though it runs on the Optus network because they trust the brand.

It also has spent $50 million on building its own fibre network in about three-quarters of NBN’s geographic areas, which helps it to defray costs. It means the company doesn’t have to pay a third party to carry data from data centres to NBN’s Points of Interconnect, which connects the NBN network to homes and businesses.

Aussie Broadband is the second internet service provider Britt has started. He founded Net Tech in 1996 and then sold it to a listed company called Datafast, which became part of the M2 Group and then Vocus.

Britt hasn’t been to university and says he barely passed high school, but has always had a passion for business. Working at Datafast, he learnt ‘‘how not to run businesses’’ and about small listed telcos.

‘‘I call that my uni degree period of learning how I didn’t want my businesses to look,’’ he says.

Along with accessing capital, another challenge in growing the company has been making a lot of changes very quickly and communicating them to the 1300 staff. Britt says the company sometimes is accused of being ‘‘fast and loose’’ with the way it manages time. ‘‘But that also allows us to move very quickly and adapt to changing market conditions quickly,’’ he adds.

The company will have close to 1700 staff once it completes the Symbio acquisition.

Finding the right talent is a challenge. Britt says it’s difficult finding people who ‘‘can think big enough’’ for what the firm is trying to achieve. ‘‘A lot of people have trouble not seeing what the future looks like when it’s unclear or a bit murky,’’ he says.

Aussie Broadband is now a national internet provider, but Britt says it still has a ‘‘strong regional heart’’, with call centres in Gippsland and Dandenong and one in Perth.

In the 2023 financial year, it earned revenue of $788 million – up by close to a quarter – and operating earnings of $89.6 million. It also increased its NBN market share to 7.6 per cent.

When the Symbio acquisition is complete in February – subject to regulator approval – the company’s revenue will be made up of about 50 per cent residential, 30 per cent wholesale and the remainder split between business, enterprise customers and government.

Britt expects Aussie Broadband will make more acquisitions in future.

In the next 18 months, the company will be installing new technology systems. ‘‘Our technology has been what’s allowed us to lead and differentiate and we feel that we can do more in that space to let us to continue to disrupt and lead in that space,’’ he says.

Britt, who admits to having recently contemplated his future with the company, took three months of long service leave in the middle of this year. ‘‘I’ve come back from that quite reinvigorated and ready to continue to roll the dice a bit longer.’’

DISC: Held in SM & RL

Whilst I can't add anything more than @mikebrisy's excellent H1 FY23 coverage I figured I'd share some of the major investment bank brokers views on ABB post the H1 FY23 results are. There aren't that many of the major investment banks which cover ABB but of those that do:

Credit Suisse: Outperform with a 12m price target of $3.40

Changes to forecasts: We slightly raise our FY23/FY24 EBITDA estimates (by 1-2%) with lower Business and Wholesale revenues counterbalanced by higher gross margin. Our larger EPS upgrades are as a result of taking acquired intangibles amortisation below the line (with underlying D&A largely unchanged), more than offsetting higher interest costs.

Target price unchanged at A$3.40/share: With only minor changes to our EBITDA estimates, we maintain our target price of A$3.40/share and OUTPERFORM rating

JP Morgan: Overweight with a Dec 23 price target of $3.50

Aussie Broadband reported a mix result: while EBITDA of A$41 million (a new record) was 9% ahead of our numbers, this was driven by operating leverage rather than subscriber additions. As a result, the company has downgraded revenue and upgraded EBITDA guidance. Residential subscriber growth is starting to decline at a faster rate than we expected, highlighting the competitive market and aggressive pricing from peers. While management is still committed to reaching 1 million broadband subscriber subscribers by FY2025, this now appears increasingly challenging without M&A. Nonetheless, with the stock trading at an EV/EBITDA of 8.5x at the mid-point of guidance and with over 20% growth expected in each of FY2024 and FY2025, we remain Overweight

Morgan Stanley: Underweight with a price target of $2.40

1HFY23 results mixed; revenue guidance downgraded but EBITDA guidance lifted on higher-margin customer wins

ABB is a well managed telco. Even with 1H revenues below expectations, management found a way to almost make the EBITDA number and actually lifted full-year FY23 EBITDA guide. We maintain a cautious view. Competition is intense and ABB's premium multiples require continued positive surprises

Results confirm our thesis of ABB entering lower-growth phase. ABB delivered positive rev. growth in 1H, but run-rate continues to slow given that NBN migration has played out, and competition for new subs is intense. Total rev. grew 27% on pcp (incl. pro-forma OTW numbers), compared to 46% growth in 1H22 and 89% growth in 1H21. We expect industry competition to remain intense and, as such, believe incremental growth will get more challenging.

Integration of OTW acquisition tracking well, with ABB making solid progress on synergy realisation. ABB management have done well integrating OTW and realised ~A$2.2m from the acquisition in 1H. They expect A$5.3m for FY23. Synergy guidance of A$8-12m by FY25e was reaffirmed.

Premium multiple vs. telco peers not justified in our view. ABB is currently trading on ~10.5x EV/EBITDA vs. larger peers TLS, TPG and SPK on 7-9x. We forecast ABB's revenue growth to slow sharply from this point (FY22-25e cons. revenue CAGR of ~24% vs. FY19-22 CAGR of 76%) and see widening earnings risk given industry competition, new substitute products and technology change.

Keep UW but lift PT to A$2.40/share (~20% downside): We cut FY23-25e revenue by 3-5%. We lift FY23e EBITDA by 1.6% to the mid-point of the guidance but cut FY24e/25e EBITDA by ~5% on lower expected revenue. PT rises to A$2.40/share on EBITDA uplift and roll forward of multiples. 

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JP Morgans report also includes some of their key takeouts from the ABB conference call:

Aussie Broadband management held a conference call following the release of the company’s interim financial statements. The call focused primarily on changes to guidance, growth opportunities in the business and adjustments to NBN reselling costs. We summarise the key points from the call below.

Management remains committed to 1 million broadband services by FY2025:

Aussie Broadband reiterated its target to become the fourth-largest provider of communications and technology services with 1 million broadband services by FY2025. The company intends to achieve this target through its technology platform, its people and growth.

Aussie has increased its NBN reselling share to over 7%: Further growth in NBN residential reselling subscribers has now seen the company achieve a market share of 7.01%, up 1.4ppt on the prior corresponding period. Management did concede that the market has matured and industry growth has slowed given the NBN rollout is now largely complete. However, management indicated that January 2023 was “a great month” for subscriber growth, while February 2023 was also progressing.

Enterprise & Government (E&G) key focus area of growth: Aussie highlighted that while non-residential services were a small component of overall revenue, Business, E&G and Wholesale were significantly better margins. Management indicated that the company was building trust in the high-margin E&G segment which was particularly attractive because it offers recurring revenue growth.

Downgrade to revenue guidance partly attributed to slower growth in Mobiles:

Aussie Broadband indicated that the reduction to the revenue guidance was due to not hitting growth in Mobiles, and slower-than-expected growth in Wholesale (via Origin Energy). Management also noted that guidance includes the sale of assets within Over-The-Wire albeit the contribution this year was minimal.

On track to deliver on synergy targets: Mgmt indicated A$2.2 mn in synergies had been achieved from the OTW transaction with a further A$5.3 mn targeted for the June 2023 half. Total synergies of A$8-12 mn are targeted for FY2025.

EBITDA guidance upgrade due to cost management and operating leverage:

Notwithstanding the reduction in revenue guidance, management flagged that the increase in margins expected for the second half of the fiscal year is due to: effective CVC management, disciplined staff growth and strong gross margin performance driven by operating leverage now flowing from scale and owned infrastructure.

Impact from Optus data breach was mainly in Mobiles: Interestingly, management noted that the Optus data breach had a temporary (10-day) impact on Mobile subs, but there was no discernible impact on Fixed Residential subs.

Waiting on SAU outcome before further adjustments to NBN reselling prices:

While the currently proposed SAU is beneficial to ABB because of its higher-speed customers, mgmt indicated larger telcos are putting pressure on NBNCo to make adjustments to wholesale prices at the lower-speed plans. According to mgmt, the ACCC is supportive of those changes and will approve the SAU for commencement on 1 July 2023 should those changes be put through by the end of March 2023. Once there is clarity on the SAU, Aussie intends to make adjustments to plan prices, but will not move ahead of that in order to avoid a potential churn event 

DISC: Held in SM & RL

After reading @Bear77's extensive #bull case coverage I thought I might mention that there is another major broker (JP Morgan) which covers ABB so I figure I might as well add a little more confirmation bias to the pool for you @Bear77 :)

JP Morgan - on 29/08/2022, Overweight, Price Target (Jun-23): A$5.65

... some snippets from their most recent broker report below ...

Market appears to be skeptical of ABB's growth aspirations

After what initially appeared to be a solid result with most metrics in line with consensus, the market reaction suggests investors are more concerned over the lowering of FY2023 expectations than the strong aspirational growth target in FY2025. With the stock price at 50% of our valuation, we have taken a more conservative view of growth but even after adjustments, ABB remains one of the cheapest stocks under our coverage. We would highlight that guidance implies more than 100% growth in EBITDA in FY2023 (albeit partly due to the OTW acquisition) and ABB trades at 6.8x FY2024 estimates compared to Telstra at 7.1x and TPG at 8.0x

 Target of 1,000,000 broadband subscribers by 2025: Aussie has set an ambitious target to reach 1 million broadband subscribers over the next 3 years. With current subscribers of 585,000, this implies a net subscriber gain of 415,000 over the next 3 years. We note that this is almost the exact number of subscribers that Aussie has grown over the past 3 years which may be the foundation for the target. We currently forecast Aussie to reach 940,000 by FY2025 and believe a further uptick in white-label or inorganic growth may be needed to reach this target.

 Higher costs drive guidance lower than expected: Aussie Broadband provided FY2023 revenue guidance of A$800-840 million and group EBITDA margins of 10.0-10.5%. This implies FY2023 EBITDA of A$80-88 million. The lower than forecast guidance (versus consensus at A$90 million) and run rate of net subscriber growth for the September quarter were the negatives from the result. However, we do note that Aussie Broadband has historically reinvested any surplus cash flow back into growth which has been a strategy which has proved successful in the past.

 Aussie looks cheap as it now trades at mature Telco multiples despite growth trajectory: The recent market reaction to the June 2022 quarter release and FY2022 financial results values ABB at an EV/EBITDA of 9.3x FY2023E and 6.8x FY2024E. Despite consensus EBITDA growth of 60% from FY2023 to FY2025, these multiples are now in line with Aussie’s mature Telco peers. We estimate Telstra and TPG to trade on FY2024 EV/EBITDA multiples of 7.1x and 8.0x, respectively.

 Retain our OW rating: Our June 2023 price target is based on our DCF valuation using an 8.8% WACC, equity risk premium of 5.5%, risk-free rate of 2.5%, and perpetual growth rate of 2.5%.

Disc: I've also recently been considering taking a small position in ABB IRL as well