FY22 at a glance  

• Revenue increased 56% throughout the year to 547m 
• EBITDA before non-recurring items increased to 39.4m, up 107%  
• Cash flow positive – 37.8m of cash intake – up 49% on FY21 figures  
• Gross margin increased to 29.5% (previously 28.1%) 
• Evidence of scaling vs FY21 – revenue increased by nearly 200m, while network/hardware expenses increased by 130m. We did however see a sizable jump to staff expense (another 30m), while marketing also increased (5m). 
• NPAT (before amortisation of acquired intangibles) came in at 10m, an increase of 223% 
• Net profit 5.3m, after making a -4.5m loss in FY21  
• Net debt 138m 
• Cash on hand 47.7m 
• FY23 update: 15k total net adds across all markets. Uncertainty around market conditions remain, in addition to a number of potential upside opportunities and downside risks.  
• FY23 guidance: quite aggressive, expecting revenue of 800-840m and an EBITDA margin of 10-10.5% (vs 7% in FY22).  

I am mainly pleased; most things are ticking along as anticipated. But there has been a serious increase to investing cash outflows (308m vs 17.1m), largely due to the OTW acquisition and fibre rollout. Who would have thought investment in oneself would be expensive? :-) 

In total, there was a 9.3m net decrease in cash and equivalents, but with almost 50m cash on hand I don’t have any real concerns here.  

Similar to my assessment of Codan no longer being just a metal detector business, ABB is no longer just a retail NBN provider. This is a more balanced, diversified business than it was 12 months ago – thanks to the OTW acquisition and a shift in strategy. 

Looking ahead, the proposed NBN pricing is currently being discussed by relevant parties. This is definitely something to watch. ABB suggest the last update (August 2022) is a positive step forward, with CVC to be phased out over a 3-year period. Where things get really interesting is where the biggest improvement appears to be to the cost structure – high speed tiers – which is where ABB likes to fish.  

It also emphasises the continued shift in strategy we are seeing. The business is increasingly pivoting from being your standard NBN reseller, to targeting higher margin services at the top end of town (which is also where costs will largely decrease in the proposed cost structure). With residential growth slowing, there is a shift towards upsell opportunities (NBN and mobile packages etc). Management stressed they will not chase retail growth at any cost, particularly at the low/no margin residential part of the market. I put this to the test a few days ago and asked if ABB would price match the lower-quality Superloop deal. They could not have been less interested.  

On the other end of the scale, business/enterprise/govt customers continue to be where growth opportunities exist. It is also stickier and with it comes higher margins. As an example, they recently secured a three-year deal with Mitsubishi Motors with all of their locations nationally.  

Key risks to the business include uncertainly over CVC costs, staff recruitment to support further growth, wage pressures, increased market competition (NBN/5G). 

So what does the result mean?

Sometimes it's important to step back to gain some perspective. Since last year, ABB's share price has halved. What's changed?  

Well, here is a snapshot (FY21 to FY22) 

• Revenue: 350m to 546m 
• NPAT: -4.4m to 5.2m 
• EPS: -2.63 to 2.39 
• Cash from operating activities: 25.2m to 37.7m 
• Gross margin: 28.1% to 29.5% 
• Free cash flow: 5m to -32.5 

We have also seen the business make the acquisition of OTW, which expands ABB's offerings and margins, and better places it to target enterprise/government. The fibre rollout, which is 90% complete, again increases ABB margins -- but more importantly will benefit them significantly into the future.

That is a pretty remarkable 12 months. This is not a lower quality business now – in fact it is the opposite – with the business going from strength to strength over that time.  

Then again, the investment into the business has resulted in significant increases to both Capex and liabilities (the former largely being based on investments and the acquisition, with the latter primarily being borrowings, contract and trade payables). In particular, PPE more than tripled. But the business' balance sheet is healthy and I don’t have any real concerns here. What it does mean though is FCF will be impacted for the next 12-24 months while the business makes these investments. But I am far more concerned about the five-year snapshot than the short term one – hence why I can appreciate the significant investment they are making in themselves, even if it does murky the financial waters temporarily.  

The business is currently trading on a p/e of 80 and a p/s of 1.5x. With the business still growing and only just achieving profitability in FY22 I don't think using a p/e multiple is reasonable here. So despite what appears like a lofty p/e multiple, I think the current share price is an attractive one.

4Q trading update

highlights:

• FY22 EBIDTA expected at top end of guidance of $38-39 (note this was the lower end of initial guidance provided)
• residential connections 464,979 (4& QonQ)
• business connections 53,559 (7% QonQ)
• business OTW 5929
• wholesale 60,326 (16% QonQ)
• total = 584,793. Total connections are within guidance but if you take out the OTW additions then it falls below the forecast. increase of 35,882 (QonQ)
• Total Services (including voice, mobile, fetch, managed) = 738,246 (6% QonQ) (40% YoY)
• voted most trsuted telco brand in Australia by Roy Morgan which surely isn't hard given the competition but good nonetheless.

CEO reports that total broadband serices were lower than expected due to the federal election, as advertising costs are inreased therefore reduced advertising occurred. This appears to be improving now.

As anyone that follows ABB is aware a key selling point to them is the customer service they provide. The issues expereienced in Q3 with shortage of staff and wait times increasing appear to be improving and was a key focus for mgmt this Quarter.

white label continues to perform well, the Origin migration appears complete and all growth is organic. Would love to see a new white label partner announced.

The Over The Wire (OTW) acquisition does look solid. There are cross sell opportunities occuring here, with some large clients in a regional health alliance and shire council contract wins occuring this quarter. $5.2 mil annualised syndergy savings have been achieved with $8-12mil of synergies savings targeted. Given this aquisition is new it shows that the integration is going smoothly and managment are working well together.

the Aussie Fibre project is 90% complete and as announced previously will generate $13.5 mil YonY savings. This is the most exciting part for me. Given they will have their own infrastructure and are looking to continue the expansion margins will increase/improve and then they become an infrastructure play. We have seen how private equity love infrastructure plays so does this bring ABB into the sites down the track.

Overall a solid quarter. I am a little disappointed at the number of new connections this quarter. They have added the OTW connections into the total amount to beef up the numbers but having said that do state this in their announcement (they are not trying to hide it). They continue to win maarket share from the big boys and with advertising now back on track I hope to see these numbers continue to improve. The OTW acquisition seems to be tracking along well and I do see it as a really positive acqusiiton in the long term. Will continue to hold for now.

I listened in to the investor call. Some notes to add. Churn appears to be an issue. Actually it was surprising to hear that the CEO was working in the call centre with the purpose trying to identify why people were leaving (good leadership however). Initial assumptions would be to go to 5G or to another telco offering a cheaper price but he said a large chunk of people were either returning to their parents home or to live with a group of friend as expenses have increased, he said landlords were selling homes and again having to return to parents homes. They have not seen as improvement in churn in the month of July and it continues to be an issue.

DISC- held IRL.

Nicely put @jayjayjayjay. Despite new connections slowing up, my thesis remains intact. The business continues to command respect from the industry, and they are generally liked by the majority of customers – their point of difference in an otherwise unpopular market.

Net additions weren’t quite as impressive in Q4 (see below). Excluding the OTW acquisition, total broadband services came in slightly below previous guidance provided, due to reduced marking through the federal election (presumably it was more expensive to advertise during this period?). This is something to watch – they can’t be expected to continue the growth they have achieved in the retail segment, but slow organic growth will supplement the opportunities that lie the business space. Post Q4, ABB’s NBN market share is expected to be around 6.5%, up slightly from the 6.2% reported in March.

Addressing call wait times (absolutely essential) and receiving another industry award are further positives from the quarter.

The report includes an update on the OTW acquisition and integration. Management note OTW has strengthened ABB’s business offering and added 16,000 business, enterprise, government, and wholesale customers – where I think ABB should be looking to expand and where I think the majority of opportunity lies. The integration is progressing as planned and they are already generating revenue synergies from the acquisition, including two large regional health alliance and shire council deals recently signed. The integration is expected to be fully completed in Q1 FY23, which will result in margin improvements and improve fault restoration times. Synergies relating to the migration of Aussie voice traffic onto the OTW network has yielded 2.9m in annualised savings, more than initially expected. When you include a further 2.3m in other synergies achieved, this brings total cost synergies to 5.2m annualised. So they are strengthening their business offering and synergies are enabling savings – that is pretty impressive if you ask me.

More savings (13.5m) will be generated from Aussie’s fibre rollout, which is 90% complete. This is expected to be fully complete in Q1 FY23. The business note they are starting to identify further opportunities to expand their network, with a number of buildings identified. This will enhance their ability to generate new sales. Moreover, new connected buildings have excellent scale benefits – when one customer is added, the next customer (added) in the same building typically has 80% lower capex costs, compared to the first.

There is also an update on CVC and NBN pricing – essentially ministerial intervention is calling for a reset in NBN’s pricing approach. This should be good for ABB and the industry in general, but this probably warrants a separate straw.

Growth is priced in – and expected by the market – so its important ABB continue to grow slowly while it shifts into new verticals. That is the main risk I see at the moment. That said, management, led by founder Phil Britt, continue to run this business exceptionally. I am comforted by their continued focus on the long term, and the steps they are putting in place that should see the business benefit in 3-5 years time.

Disc: held