Aussie increased prices for most of its NBN plans under a year ago, and they have now indicated a further price increase for some of their plans. To the NBN value plan for example, both of these price increases will theoretically have seen the price rise - per plan, using their NBN value 50/20 mbps as an example - from $79.00 to $89.00.

The recent price increase, set to impact customers in July, is due to 'the rising operating and wholesale costs have meant we have had to add a slight increase to the cost of your plan'. Their next set of figures should provide insight into their churn. Sure, they will have your usual internet users that swap in and out of deals, but if churn remains relatively low in a time when many households are experiencing financial hardship, we may start to see the thesis arise that Aussie can withstand competition from elsewhere while charging more.

Aussie Broadband have released a further announcement regarding their stake in Superloop.

1. They've now submitted an application to the Singaporean authority, IMDA, for the Superloop shares they've already acquired.
2. They have applied to the Federal Court of Australia to restrain Superloop from forcing them to dispose of the shares

One possible outcome here was that with the initial acquisition being rebuffed, and the recent increase in Superloop share price, Aussie Broadband could dispose of their Superloop stake for a tidy profit. That now seems unlikely, at least in the near term.

Aussie Broadband have announced they are being directed to dispose of some of their interest in Superloop.

From the announcement:

Under the constitution of Superloop (Superloop Constitution), there are certain provisions regarding the acquisition of Superloop shares which derive from regulatory requirements relating to the Singapore Facilities-Based Operations (FBO) telecommunications licence held by Superloop’s Singapore-based subsidiary (Superloop Singapore). Specifically, the Superloop Constitution provides that a person must not, alone or together with their associates control, 12% or more but less than 30% or, 30% or more, of the voting power in Superloop without the prior written approval of the Info-communications Media Development Authority of Singapore (IMDA).

Superloop claim Aussie Broadband knew full well about this requirement, since their prior acquisition of Symbio would have involved dealing with the Singaporean IMDA. Aussie Broadband claim their failure to comply was 'inadvertent'.

Inadvertent is an interesting word to use. They can't claim `unaware` since they clearly should have been aware.

Either they overlooked this requirement, which suggests poor strategy, or they were aware and figured it was better to beg forgiveness than ask permission. I'm inclined to believe it was the latter.

I'm uncertain how to proceed here. The prior acquisitions have been successful but I didn't buy ABB expecting a series of acquisitions. I'm not sure how to evaluate this (seemingly) aggressive approach to acquisitions. That's not a value judgement: it's probably a fine strategy for the appropriate company, just not my cup of tea.

In particular, I'm wondering:

1. How important is this acquisition to ABB?
2. If it was important, have they bungled it? Or was this a strategic manoeuvre beyond my view (ie. they must have known about the IMDA requirement) ?
3. The price is continuing to drop, yet their holding in Superloop has appreciated. If the price looks good can I get comfortable with where management is headed?

Still thinking on this one.

$ABB just received surprise termination of their white label wholesale contract with Origin.

ASX Announcement

As a further twist, $SLC have announced a 6-year exclusive deal with Origin.

$ABB have a NBIO to acquire $SLC and own 20% of $SLC.

As pure luck would have it, I recently divested my $ABB holding, in anticipation of turmoil in the $ABB and $SLC contest. However, I didn't see this coming.

No doubt the market will react negatively, as this points to the intense competition that will no douby play out in the enterprise, business and wholesale segment. (Perhaps I was right to follow my instinctive dislike of this segment.)

For now, I will watch with interest from the sidelines, but remain alert to any over-reaction presenting an opportunity.

Disc: I do not hold $ABB or $SLC,.... and I'd never ever hold $ORG

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

Today, I have exited $ABB, taking advantage of further exuberance this morning.

It was a finely balanced decision, but overall I have decided to maintain the discipline of adhering to my investment thesis.

In September and October 2022, having assessed that the market had completely over-reacted to the slowing resi growth, following the combination of $ABB and $OTW, I built a RL position in $ABB over 4 weeks at an average cost of $2.28/sh.

The thesis was simple: as an attacker with a strong customer focus, execution and reputation, having built its own fibre backbone to access high value markets, focused on the high margin segment, $ABB was stealing market share from incumbents at very attractive margins. Given the location of its network, and inevitable slowing Resi sales (as NBN buildout completed), it turned its focus to the higher margin Business, E&G and Wholesale markets. I epxected it to win here too.

My valuation was predicated on this focused attacker model, with strong growth in the business segments and continuing above-market growth in Resi, driven by its network and reputation. Valuation $4.50 ($3.67-$5.04)

With the announcement of $SYM, I eventually got comfortable that I could hold to the valuation, arguing that the $SYM customer base and product set MIGHT strengthen market positioning in the B, E&B and W/S segements. International was an open question for me, but I wasn't unduly concerned given it relative immateriality. I was also encouraged by what appeared from the outside to be the successful integration of $OTW, with the CEO retained as part of the management team, and good growth in all segments at the FY23 and 1HFY24.

I was concerned about the integration risk, but was prepared to give management the benefit of the doubt. While I didn't update my valuation, in my mind, the risk part of the equation was increased.

Now the low-ball offer for $SLC and the 20% stake, unsurprisingly dismissed out of hand. To me it seems inevitable that $ABB will come back with a significantly improved offer. They've taken the 20% stake, and as a minimum they want to get into a dataroom and do due diligence. And $SLC knows it, so they won't make it easy.

As discussed here yesterday, $SLC is a very different business with a large network of regional and international capacity. Is this complementary to $ABB or dilutive. I don't know. I don't understand the business logic of the combination.

Secondly, it is a bigger and even larger deal than $SYM. Management are going to have to focus on two successive integrations.

Again, while I haven't done a valuation, it is clear that NewCo will carry higher debt at c. $250m, the eventual price for $SLC will dilute $ABB (I've done a quick proforma which indicates NewCo ROE could be around 7.5% in FY24 before synergies, whereas $ABB is around 9%, even though it is possible it will be EPS accretive).

But what about the famous Aussie customer focus? There will potentially be a protracted period of change. $ABB has alrady said that it will run $SYM as standalone initially, So presumably that will apply to $SLC.

And what about Phil Britt? When Phil returned from long service leave a while ago, he said something quite telling, which I've never forgotten. They were words to the effect that he was considering his own future. Of course, after his leave he put everyone at ease but putting the question down, but it made me realise that while I have a lot of confidence in Phil, I don't really know that much about the rest of the bench, nor what the succession plan might look like.

These and other questions mean that I no longer have confidence in my valuation (above). The market gave me the opportunity this morning to cash in at $4.70, and given the risk-reward and the many question-marks in my mind, I decided to take the money.

So, I could be wrong, And I may well be. The NewCo combination might indeed benefit from the improved scale, talent, product suite and weight to attack B, E&G and W/S more vigorously, and accelerate the demise of the lumbering incumbents. But it will be a competitive fight, and what does that mean for margins in future?

So my thesis today is to maintain $ABB on my Watchlist. Who knows, after the combination is delivered (if it is delivered), we may see another SP stumble, like we did in OTW. At that point I will be able to value the NewCo on a solid set of numbers, and see if opportunity knocks once more, I'll be waiting.

-----------------------------------

As I wrote in my Straw when I first reported acquiring a stake in $ABB, I don't really like telco-land. But I am pleased it delivered over a 100% return in less than 18 months.

Farewell $ABB, Good luck. But, hey, I'm still a customer, so don't mess up!

Disc: No held in RL and SM

ASX Announcement

$ABB has come out this morning with an all-scrip non-binding indicative bid for Superloop, clearly deciding to leverage its recovered SP.

The deal implies a value of $0.95 per $SLC share, against Friday close of $0.875.

I note that across 5 analysts that cover $SLC, the range of broker vals. are $1.00 to $1.17, which is quite a tight range and indicates that there may (will?) be a need for $ABB to raise their bid significantly before getting a Board recommendation.

So, its an opening deal to allow $ABB to get the due diligence process underway.

$SLC delivered strong results last week, with Revenue up 32.7% to PCP, underlying EBITDA of $23m up 83% to pcp and OpCF of $24m.

$SLC would significantly enhance $ABB's infrastructure network, although I don't yet understand what the implications of overlapping coverage in metro areas is.

Clearly, coming right of the back of the finalised $SYM deal, $ABB has decided that its strategy is to concentrate the market of the leading attackers, to strengthen it ability to continue to take share from the major incumbents.

This is a significantly larger deal than either $OTW or $SYM.

The deal looks a bit low-ball, so my bet is that $SLC board will decline.

ASX Announcement

$ABB announced their 1H FY24 result this morning. The results have so far been well-received by the market with the SP at time of writing up 16%.

There’s some detail to understanding the results, however, at a total connections basis, $ABB’s share of NBN connections has increased to 8.3% from 7.0% in the PCP (and 7.6% at FY23). What this means is that new connections accelerated in the H-o-H comparison. This, as well as some minor upgrades to FY24 guidance appear to have driven an initial positive response. (Of course, what the market is really reacting to is that in December I finally became an Aussie customer!)

Their Highlights (comparisons to PCP)

• Revenue grew 17.7% to $445.9 million
• EBITDA before non-recurring items grew 12.7% to $46.3 million
• Operating cash flow grew 57.8% to $40.7 million
• Total broadband connections grew 20.6% to 765,800 with strong growth across all segments\
• Increased NBN broadband market share (excluding satellite) 1.3 ppt to 8.3%
• On track to complete the acquisition of Symbio Holdings (due 28 February 2024, post balance date) providing cloud-based voice and messaging capabilities. Strategically complementary to Aussie’s business
• Successfully raised $140 million through a strongly supported institutional placement and retail share purchase plan, strengthening the balance sheet and providing funding for the Symbio acquisition and other potential M&A
• Aussie Broadband awarded Service Champion for Customer Service Organisation of the Year, and Service Champion for Project of the Year Customer Impact at the Customer Service Institute of Australia ASEA awards
• Aussie Broadband again recognised by The Roy Morgan “Risk Monitor” rankings as Australia’s most trusted telco.

My Analysis

A strong result best examined segment by segment. But before diving in, it was good to see a strong cash flow performance with operating CF of $40.7m up 57.8% and my measure of FCF at $15.2m up from -14.1m, an improvements of $29.3m, driven by both OpCF improvements and falling capex.

The changing capex profile is well-signalled, as $ABB moves from a focus of building their network to now connecting customers, maintaining, replacing and upgrading.

Overall, revenue grew 17.7% to $445.9m, with EBITDA up 12.7%. NPAT was 14.2% stronger $9.8m.

To understand the result, we need to dive into the segments.

Residential

Resi saw an uptick in new connections, with 38k (+3.3%) net adds – the highest result since 2HFY22. %Gm compressed slightly from 30.6% to 30.2% due to (what sounds like) paying for excess data charges under agreement with mobile services provider Optus. This is expected to be a one-off.

Importantly, off the back of SAU changes in December, all customers have been moved to new Resi plans. This resulted in some churn, although less than expected, and $ABB expect to see the benefits of increased margins flow through the full 2H FY24, a major driver of the EBITDA upgrade.

In addition, $ABB believe that several competitors are yet to implement the price increases impacting lower speed plans, and they stand ready to benefit from competitor customer churn in H2, as the price increases are passed on.

Business Segment

Good progress in Business, with 19.7% increased connections over pcp and 8.7% h-o-h, adding another 4.2k accounts in the half. The %GM decline is attributed to the fact that the Zintel NZ business, disposed in 1HFY23, has driven the result. Importantly, churn in this high margin segment is low at 0.8%. SAU and price changes are expected to drive margin improvement in H2.

Enterprise & Government (E&G)

Although E&G connections grew strongly at +21.7% to pcp, total revenue declined -1.2%. This was attributed to a) a sharp decline in non-recurring revenue and b) recontracting of legacy customers to new NBN and Aussie Fibre plans. So the good news is that the 7.3% increase in recurring revenue is on a higher %Gross Margin, and these benefits will flow through into the second half.

CEO Phil spoke about a strong pipeline of customers, an average of $111k new MRR being signed each month, and larger enterprise customers taking up to 7 months to onboard, due to both customer constraints, $ABB constraints and hardware constraints.

Wholesale Segment

This was the standout, with 24% connection growth to pcp and 52.5% revenue growth, with %GM margin expansion driving a 64.2% Gross Margin growth over PCP. The main driver called out here was strong wholesale voice margins.

Symbio Update

With all hurdles cleared for the Symbio acquisition, this is expect to close next week. As a result, Symbio will contribute 4 months to the FY24 result.

$ABB has committed to $5m cost synergies as a result of the combination. And the discussion indicated that this is the minimum expected, with the potential for further savings and revenue benefits on top.

Aussie and Symbio will initially be run as separate businesses and therefore we will continue to be able to track both separately at the operating level. Over time, however, I expect to see consolidation at the segmental level, with a question mark remaining as to what happens with the international business, on which $ABB has not signalled any strategic intent.

As an approach this makes sense. They can understand what they have. Consolidate and capture synergies at the overhead level, figure out to consolidate systems, before then undertaking a more complete integration.

The high level metrics of the Pro Forma combination is shown in the following slides.

In summary, it is a more diversified business, with greater weight in the Business, E&G and Wholesale segments – the next frontier for $ABB’s attacker strategy.

Management Changes

Phil announced that CFO Brian Maher will take over as CEO of Aussie, with former OTW founder Michael Omeros, taking over as CEO of Symbio. Both report to Phil who will be MD of the Group.

As an aside: It is great to see Michael Omeros, the former CEO of OTW clearly established as a leader in $ABB. Things rarely work out that way.

Guidance Update 

Guidance is modestly updated by narrowing the range for EBITDA from $100-110m to $105-110m.

Capex guidance reduced from $47-52m to $40-45m, attributable to the new guys in charge of investment taking a hard look at the programme and make some scope reductions.

Based on 4 months contribution of $SYM, the guidance for FY of the combined group was given as $116-121m.

My Key Takeaways

Across the board, these are good results with no real weakness. $ABB continues to take market share and the areas of margin weakness demonstrated today in some segements appear temporary and likely to be reversed in the second half.

No wonder the market likes the result. I agree.

Valuation

Although I don’t have half year granularity in my valuation, $ABBs result appears broadly on track with my model, and so today I am leaving my valuation unchanged at $4.50 ($3.67-$5.04).

I haven’t given any value uplift for the $SYM acquisition. That needs to be proven.

I’ll update the valuation at the FY.

Disc: Held in RL and SM

The ABB result was better than I expected. All segments of the business did well.

The key takeout for me was the success of their price rises on the residential broadband market. They had lower churn from this than they expected and added more new connections with a net increase of 38K, higher than either of the last two halfs. Now have 8.3% market share of the NBN market. Did have some short term margin compression, due to the higher marketing costs, which they said were part of the strategy around implementing their price change. I can attest to this as I have received several flyers promoting their high speed plans and bundles over the last few months. They expect margins to return to prior levels over the next half.

Enterprise and government section going well. Recurring revenue increased by 7% to 38.4m but one-off revenue declined slightly to leave the period flat at the headline level but with a slight increase in margin. Happy with the progress and commentary around this segment.

Provided this slide on the Symbio aquisiition, which I think is informative of how they see it adding to their buisness and wholesale operations. Symbio will be maintained as a seperate entity, with the CEO (Michael Omeros) from their Over the Wire acquisition running this side of the business. Phil Brett will become managing director of the overall group.

Gave a tightening of guidance to the upside with EBITDA to be between 105-110m (prev 100-110) from ABB and EBITDA of $116-121m with the 4 months addition of Symbio.

Broadband connection momentum continuing with 19000 new connections added so far in Q3. Very solid result and more than happy to keep holding.

ASX Announcement

Yesterday $SYM shareholders have voted overwhelming for the acquisition offer from $ABB.

The Court Hearing is now set for 16th Feb, with the current plan for new $ABB shares to start trading on 20th Feb.

So, the next report from $ABB will be clean, and then will no doubt include prior period reports on a PRO FORMA basis for a few periods.

It will be interesting to see what the $SYM combination does in the non-residential segments, but I suspect it will be well into 2025 before we can tell for sure.

++++++++++++++++

As an aside, I finally became an Aussie customer in December. My move had complications as a result of NBN and property access/configuration, however, the $ABB customer service was very good.

However, what was next level, was the onboarding process and the excellent automated communications as my account seamlessly switched over. I've never had an experience so good in utilities/TMT.

Best of all was the overnight speed test they performed and the report they emailed me confirming that I was getting in excess of the plan label. Their numbers actally matched my own tests.

Life is indeed better in our household. I rarely got the $TLS label claim, and whenever I tried to follow up there were lots of excuses about position of hub, my equipment, limitations with my device WiFi connections,..blah blah blha.The performance with the $ABB service has proven what I suspected all along ....it was pure BS. And I'm paying about the same as my $TLS plan, but with double the speed, and 3x-5x upload speed.

Happy Customer. Happy Shareholder. (Looks like there's been a bit of price action now that deal looks to be going ahead.)

Phil Britt (Managing Director) was interviewed recently on Ausbiz. Link here for those interested -- ABB interview starts around 19:30.

Key highlights:

• Britt had some time off, three months off long service leave. Britt admitted prior to going on this leave he was 'probably nearly done at that point' but he has come back with a renewed vigour. Britt can still see plenty of opportunities for Aussie to grow and innovate and he wants to be a part of this. Thinks he will be around for the next few years (minimum). If they keep doing 'cool things' he will be there for a lot longer.
• ***on a side note, this is great to hear. My thesis is busted without Britt at the helm.
• Some discussion around the recent Symbio acquisition -- focus on business and enterprise, and particularly wholesale. Symbio is 'all about voice' according to Britt. @mikebrisy he also touches on Asia which we previously queried (22:20) - they think there is some opportunity there but will take a wait and see approach. Doesn't sound like they will be rushing into things which is good.
• Symbio will run as a separate business. The OTW co-founder, who is still at Aussie (I didn't know this, this is impressive if you ask me) will head over and run the Symbio side of the house.
• Further M&A opportunities. Voice now taken care of with Symbio. Further opportunities across bolt on customer bases, bolt on residential/revenue opportunities, or complementary businesses for the E&G space (particularly in the consulting realm). They won't rush into acquisitions, not an issue due to ongoing organic growth.
• Capex spend -- FY23 around 47-52m, this will be similar to FY24. On a % of revenue basis, this will obviously reduce over time as revenue continues to improve.
• The risk of cyber breaches, ABB do a lot to safeguard against cyber attacks. Britt admits he is a tech nerd and he has a good understanding of where their gaps are and where they need to improve. The beauty of your MD coming from a tech background.
• First priority for the new year -- starting a tech transformation journey for a lot of their systems -- perfect time to do this with new acquisitions coming on board.

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

I've caught up this morning with yesterday's capital raising presentation.

Capital Raise Presentation

This morning $ABB announced a successful $120m institutional placement at $3.55 per share, a 9.4% discount to the last close before the Trading Halt. As might be expected the market moved down this morning in that direction, with SP at $3.60 at time of writing.

An SPP will open to raised a further $15-20m, taking total for the raise to $135 to $140m, which compares with the acquired value of $SYM which I put at around $260m, of which 75% was in cash, or c. $195m.

So, an important part of the drive for the CR is to maintain balance sheet strength. Prior to the acquistion, $ABB was at Net debt-to-EBDITA of 1.0x. Now twith the acquisition and the CR, leverage moves to 1.5x. Reasonably conservative.

Assuming all shares are issued at $3.55 then $140m will be around 40 million shares, compared with current SOI of 239m, so a dilution of 17%.

Of course its not really a dilution as it adds GM of $99m to ABB's GM of $279m, or 35% to give a combined GM of $378m.

So the question to mull over is whether to take this opportunity to increase my position via the SPP.

The presentation is informative, because if provides some insights into how $ABB sees $SYM complementing its business. The chart below shows just how important $SYM is in adding weight to the B+W+E&G segments. And the other slides articulate just how $ABB sees the $SYM product set in complementing its existing capabilities, as well as adding key customers and important partnerships.

In earlier exhanges with $StrawPeople, I think there is a consensus that $ABB continues to win in Resi, and the next battle will be in the other segments. These higher margin segments will be defended strongly by the incumbents and so $ABB adding heft to its capabilities and product set makes good sense.

With my central view on valuation of $ABB being around $4.50, if I believe the $SYM acquisition will be executed successfully and deliver an enhance ability to compete in B+E&G+W, then it makes sense to take the opportunity of the SPP.

So, I will mull this over, but at this stage I am favourably disposed. The acquisition makes sense to me. $ABB have demonstrated their ability to integrated acquisitions successfully as shown by $OTW and they have also shown that they are already competing well in these segments.

I'm still no so sure about the regional / international play, and I hope this doesn't blur the laser focus on the Aussie customer experience. I look forward to deep-diving into this at the next Investor Day.

Disc: Held in RL and SM with strong conviction

$SYM Acquisition Recommended by Board

$ABB announce the $SYM Board has accepted their offer and signed the deal, which is now subject to the usual approvals.

$ABB now in a trading halt, pending announcement of a capital raise, presumably to maintain balance sheet strength post deal.

$SYM will strengthen the $ABB product offering in voice and video servic products. Just not sure where the international bit fits, although I am sure Phil will make this clear in due course.

So far, flawless execution.

Disc: Held in RL and SM

Update on Acquisition

$ABB has concluded due diligence and now gone unconditional on the $SYM offer. Value of the deal has changed to reflect the fall over recent weeks in $ABB SP, which is down to macro conditions.

$SYM have until midnight tomorrow to accept the offer.

$ABB describe constructive and ongoing engagement with $SYM, so the tone of the update is positive.

The $ABB offer is superior to $SLCs both in its face value and the fact that there is now a deal on the table capable of being closed. So the $SYM Board would have to be faced with a significantly better offer to justify turning down in favour of another ("bird in the hand..." argument). So, if $SLC are going to respond, today or tomorrow would be a real good time. (I've not assessed the deal from $SLC's perspective, so I don't have any comment to make on that front.)

Disc: I hold $ABB in RL and SM

$ABB provided some key updates in the AGM address being presented later today:

1. NBN Market share has now passed 8%
2. Update on connections at Q1 FY24
3. Update on SAU (Special Access Undertaking) - overall favourable to $ABB
4. Rationale for $SYM takeover bid
5. FY24 Guidance Reaffirmed

I'll comment further on the last 4 items, the first item being self explanatory

2. NBN Connection Updates

In the table below I compare the YoY connection growth rates with the quarterly growth rates, and quarterly growth rates (Gq) annualised (Ga). (Note: Ga = ((1+Gq)^4 -1) and not 4xGq!)

Figure 1: Connection Growth (Connections)

Although this kind of analysis is too fine-grained to pay much attention too (e.g., because it doesn't show seasonal variations), it shows that residential growth in 1Q FY24 has accelerated significantly over the prior 3Qs. The other 3 segments are still also growing strongly in 1Q, alebit at a slightly moderated pace compared with the FY23 overall growth rate.

However, the 1Q numbers include 8,700 customers acquired from Uniti. (Hey, I thought it was 15,000, but they are reporting the number as 8,700 having migrated across in 1Q FY24, so let's take that at face value.)

So, the two tables at the bottom of Figure 1 look at the growth rates taking 8,700 out of the Total Connections and Residential Connections, to get a better handle on the organic growth (Excl. Uniti), which for ease of reading I place alongside the reported numbers (Incl. Uniti).

So, even if the Uniti Connections are excluded, the growth rate in Total Connections picked up pace to 19.8% Q-o-Q Annualised, compared with 17.6%, 18..3%, and 18.5% rates in the prior 3 quarters. And the same metric in Residential picked up to 13.9% compared with 12.3%, 12.5% and 10.4% QoQ annualised in the prior three quarters.

So, no matter how you slice and dice the numbers, Aussie is continuing to maintain strong momentum in growing market share.

3. Update on SAU (Special Access Undertaking)

The market has been waiting some time to hear how the determination for the SAU has played out. At the FY23 Results $ABB said they expected it to be net favourable for ABB. Today they published how the determination impacts their different plans. See Slide 15 below.

While the CVC volume-based charging remains on the lower speed plans, Aussie makes its money in the higher speed plans.

The net effect is that the premum plans will be cheaper and therefore more attractive to customers, which should drive incremental adoption and margin growth for $ABB.

In a word - good news. (Looking forward to signing up for Power House Plan!)

Slide 15 from Presentation

4. Rationale for the $SYM Acquisition

While the due diligence period has been extended by a week, Phil set out the following rationale for the takeover in his MD's address as follows:

"We believe that Symbio’s range of services and platform would complement Aussie’s NetSIP operations. Symbio offers three product sets: Communications Platform as a Service, Telecommunications as a Service, and Unified Communications as a Service. The business hosts 7.3 million phone numbers, carries 9 billion voice minutes, and manages over 180,000 mobile, nbn and voice services for other MSPs. In FY23, Symbio reported revenue of $211m and underlying EBITDA before one-off items of $27.7m. We are continuing our due diligence, and we will provide a market update at the appropriate time."

While the rationale is just as we have discussed here in other straws, it is silent on the international aspect of the business. For now, we just have to see what happens i.e., whether the deal progresses.

5. FY24 Guidance Reaffirmed

Good on 'ya Phil. Enough said. (Of course given the run up in SP some might be disappointed not to see an upgrade, however, it is early in the FY.)

My Key Takeaways

$ABB tracking nicely in line with the thesis.

It will be good to see how the $SYM deal plays out.

Disc: Held in RL and SM

18-Sep-2023: The following straw is one year old, but it's aged well I think. I've added an update at the bottom.

06-Sep-2022:

Aussie Broadband Ltd (ASX: ABB)                      

Website:  https://www.aussiebroadband.com.au/

Sector: Telecommunications and Data, ICT (Information and Communication Technology), specifically ABB are an Internet Service Provider (ISP) and a provider of other Telecommunications services.

Value Drivers:

• Sentiment around the Telco sector in Australia, particularly the smaller end.
• Profitability and growth, increasing profitability, continuing growth, meeting and exceeding expectations.
• Maintaining a high NPS and increasing market share.
• Positive M&A.

Business Description and Competitive Advantages:

Company Overview (from: https://www.aussiebroadband.com.au/investor-centre/)

Aussie Broadband is a challenger internet service provider, with a reputation for providing high-quality internet and transparent customer service.

We have grown to become Australia’s fifth largest provider of nbn™ (NBN) services, connecting more than 300,000 residential and business customers across the country.

We offer a range of services across the residential, small business and enterprise segments, including broadband, VOIP (Voice over Internet Protocol), mobile plans and entertainment bundles through a partnership with Fetch TV.

https://www.aussiebroadband.com.au/blog/aussie-broadband-beats-the-big-four-at-customer-service/

Aussie Broadband | ProductReview.com.au

Aussie Broadband Review: Value-packed NBN Plans | Reviews.org AU

Aussie Broadband named “The most trusted telco brand in Australia” by Roy Morgan in their annual “Most trusted and distrusted brands” research (2022). Source: ABB FY22 Results Announcement (29-Aug-2022)

https://netpromoterscore.guru/aussiebroadband-com-au.amp

NPS Explained:  https://customer.guru/net-promoter-score

ABB have very high customer satisfaction and promote themselves as being customer-focused with their call centre here in Australia. They go out of their way to ensure their customers are happy with the service they receive, and they take complaints seriously and investigate them thoroughly. Feedback from their technicians is also really good. From a quality of service point of view and also from a customer service POV, they are leaders in their industry.

Aussie Broadband are not the cheapest provider, but they are the best ISP in all other respects.

Which Australian ISP has the most satisfied customers? | CHOICE [27-May-2021]

Excerpts:  

We gathered feedback from more than 1800 people for our ISP satisfaction survey so you don't have to settle for the devil you know. Or you might find out you're already with one of the best providers out there, meaning you can stay put with confidence.

Most common problems

Just under half (45%) of respondents had problems with their current ISP in the six months prior to the survey.

Aussie Broadband stood out with 76% of its customers reporting no problems with their internet, compared to Telstra (55%), Optus (50%), TPG (56%), iiNet (51%), and Vodafone (52%).

Aussie Broadband also scored significantly higher than the other providers for Connection Speed, Value for money, and Reliable Connection, i.e. ALL of the categories that Choice covered.

In the graphic above Choice was providing the results for all connection types and in the graphic below they are only covering NBN connections, however, once again, Aussie Broadband also scored significantly higher than the other providers for Connection Speed, Value for Money, and Reliable Connection, in addition to Overall Satisfaction, i.e. ABB were the clear winners in ALL of the categories that Choice covered.

There’s their main competitive advantage!

Market Cap and Share Price:

M/cap = $608m (at $2.56/share on 05-Sep-2022).

Share Price = $2.56 (05-Sep-2022). 12 month low/high = $2.45/$6.03.

Valuations:

From fnarena.com:

Of the 7 brokers that FNArena covers (being UBS, Credit Suisse, Morgan Stanley, Ord Minnett, Macquarie, Citi and Morgans), only two of them (Ord Minnett and Credit Suisse) cover ABB:

Credit Suisse - on 30/08/2022, Outperform, Target: $3.70, Gain to target $1.03

FY22 operating earnings were slightly ahead of expectations while guidance was below. Aussie Broadband has guided to revenue in the range of $800-840m with an EBITDA margin of 10-10.5%.

Additional investment in people and product development is planned, while the broker suspects inflationary pressures in a tight labour market are impacting the cost base.

Guidance also assumes a heightened competitive environment will be maintained over FY23 so any withdrawal of discounts from competitors could provide upside risk.

Outperform maintained. Target is reduced to $3.70 from $4.80.

Target price : $3.70, Price : $2.67 (30/08/2022), Gain to target $1.03 (+38.58%)

(excluding dividends, fees and charges).

Ord Minnett - on 30/08/2022, Buy, Target: $4.03 Gain to target $1.36

FY22 operating earnings were ahead of expectations with growth across all three of Aussie Broadband's segments. The main surprise for Ord Minnett was FY23 guidance of $800-840m in revenue and implying EBITDA of $80-88m, below the prior forecasts.

The broker accepts the business is investing in operating costs and overheads to support its customer service yet notes it is facing a more competitive market to win subscribers.

The broker forecasts more than 50% of the FY23 group EBITDA will be generated in the business segment. Buy rating retained. Target is lowered to $4.03 from $4.69.

Target price : $4.03,  Price : $2.67 (30/08/2022), Gain to target $1.36 (+50.94%)

(excluding dividends, fees and charges).

In summary, the current recommendations (most recent, both as at 30-Aug-2022) from CS & OM are:

The entire 30-Aug-2022 update from OM is available here:  https://www2.asx.com.au/content/dam/asx/broker-reports/2022/abb-update-ordminnett-2922.pdf

Note that Ord Minnett acted as a Co-Manager of the ABB share placement announced 7th September 2021 and received fees for providing that service, so they have likely placed clients into ABB and their views should not be assumed to be entirely independent and without any bias. This is usually the case with most broker reports however, and they can still contain some useful information and facts even if they are likely to paint the company in a favourable light.

See also the Commsec summary of broker recommendations towards the end of the next (Ratios/Metrics) section.

Ratios/Metrics:

From FNArena (https://www.fnarena.com/index.php/analysis-data/consensus-forecasts/stock-analysis/?code=ABB)

From Commsec:

They are a fairly young company, having only IPO’d in October 2020, so they’ve been listed less than 2 years at this point, hence not much data being available.

ABB was not profitable in FY21, but were profitable in FY22, however their share price has come down a lot lately meaning that they have become a lot cheaper. Their PE is fairly meaningless because their earnings are still low because they have just become profitable, however they are growing at a good clip and their metrics are moving in the right direction.

Debt / Balance Sheet Strength:

Net debt (including finance leases, excluding operating leases) was $138.3m at 30-June-2022.

Net Gearing on 30-June-2022 was 62.9% according to Commsec. 

They were in a net cash position at 30-June-2021. The debt has come principally from their acquisition of OTW (Over The Wire) in the December-January period of FY22, which ABB believe has been a major acquisition that has propelled them to what they are calling Aussie Broadband 2.0 in the following slide from their FY22 Results Presentation (on 29-Aug-2022):

While their current debt is significant, it is understandable and, while worth keeping a close eye on, it should be eminently manageable and should be paid down relatively rapidly I expect over the next few years.

Another reason for the debt is that they have been building out their own fibre networks in some of Australia’s major cities. That infrastructure that they own is also providing them with a significant competitive advantage and assets that will provide benefits for decades to come.

Dividends:

No dividends yet. Only IPO’d in 2020. Have just become profitable in FY22.

Guidance:

29-Aug-2022: Trading update

Aussie Broadband has continued to grow over the first eight weeks of FY23. Total net adds (gross sales, less churn) were 15,332 across the enterprise & business, residential and wholesale customer segments. Of this, 1,572 were higher margin business, enterprise net adds. While there are several competitor low/no-margin offers in the residential broadband market at present, Aussie Broadband will not chase growth at any cost and is focused on striking the right balance between growth and margin.

The Company continues to successfully market to higher value residential customers who prioritise solution value and customer experience over price, while also focusing on converting higher margin enterprise & business and government customers within the Company’s growing pipeline of new customer opportunities. This strategy underpinned the growth in margin over FY22, and will continue to drive margin growth expected in FY23.

FY23 guidance

Based on current market conditions, operating plan and year to date trading, Aussie Broadband expects to generate revenue in the range of $800 million to $840 million in FY23.

Planned growth in higher margin business, enterprise and government customers, and with the full year benefit of Over the Wire, is expected to deliver an EBITDA margin (excluding integration costs) of circa 10.0% to 10.5%, up from 7.2% in FY22. This margin is after additional investment in people and product development to support longer term growth in Aussie 2.0. 

With the Company currently in the early stages of FY23, there remains uncertainty around market conditions, in addition to a number of potential upside opportunities and downside risks as outlined in the investor presentation released today.

Commenting on the Company's positive outlook and continued growth in FY23, Mr Britt [ABB’s MD, Phillip Britt] said: “Having delivered continued growth across all key operational metrics and record financial results in FY22, Aussie Broadband is well positioned to deliver another record year in FY23. We have now well and truly started implementing our Aussie 2.0 strategy, with multiple attractive growth opportunities in the business, enterprise and government sectors that will underpin our ability to become Australia’s fourth largest communications and technology services company.

“The ingredients for our continued growth are evident. We are rapidly growing in the business, enterprise & government, and wholesale segments. Our unwavering focus on product and technology innovation, as well as customer service, has reinforced our “value” proposition for 5 customers and differentiated us from other providers. Our balance sheet also supports ongoing attractive organic growth initiatives.

“As the benefits from the execution of our growth strategy come to fruition in FY23, we expect to deliver a step change in EBITDA over the next 12 months. A full year of earnings from Over the Wire, revenue and cost synergies from that acquisition, cost benefits from our fibre network, offset by some cost inflation and further investment into growth initiatives, is expected to substantially lift earnings and cashflows for the business.”

Source: ABB FY22 Results Announcement. [29-Aug-2022]

See also: ABB FY22 Results Presentation. [29-Aug-2022]

It is a major positive in my view that Aussie Broadband are rolling out their own fibre, as telcos that own infrastructure are always more valuable, especially as takeover targets for somebody down the track. Owning some of their own infrastructure also gives them some advantages over other providers and some pricing power at least with regard to their own stuff. The NBN has to some extent levelled the playing field, but those Telcos/ISPs that own some infrastructure themselves have the ability to package that and differentiate themselves. Fibre is also still the fastest internet available, and ABB do use superior speed as a major selling point in their advertising.

Management

The ABB Board:

See: https://www.aussiebroadband.com.au/investor-centre/

Video Link: https://www.youtube.com/watch?v=ygzNWuZfojE

People and Culture:

Having had some feedback from some of the contractors who have worked for ABB, the general feeling is that they are good, they do care about their customers and their customer service, they do take complaints seriously and try to rectify issues very quickly when they do occur. It also appears that ABB management actually value their employees and want to be viewed as an employer of choice as well as scoring well with ESG credentials, as the following slide explains:

The overall gist of the feedback that I've read is that most employees regard the company as a good one to work for, that cares and is trying to do the right thing by their workers, and it looks like by the community and the environment as well, so the feedback seems to match the investor relations material (such as these slides), which is positive.

Upside (reasons to buy):

• Fast Growing Telco/ISP who are leading the industry in customer service and customer satisfaction.
• Despite listing less than 2 years ago, they are already profitable.
• They are putting runs on the board: 
• However those runs on the board are not reflected in the share price which has come down significantly from $6/share to around $2.50/share, levels we haven’t seen since January 2021, shortly after they listed on the ASX.
• ABB is rolling out their own fibre networks in major cities which is valued infrastructure that will provide benefits for decades.
• Well incentivised Board and Management: All of the 6 Board members are ABB shareholders with one NED, Patrick Greene holding over 10 million shares (4.36% of the company, via Greene’s private company, Panama Trial Pty Ltd) and ABB’s MD, Phillip Britt, holding over 16m shares (6.84% of ABB, through a company he controls called Digital Interworks Pty Ltd). A recently retired executive director, John Reisinger, through a company he controls (Intertubes Pty Ltd) also controls 6.84% of ABB (holds over 16 million shares) and John bought half a million dollars worth of ABB shares in early March and another half million worth at the end of August (one week ago), as did Managing Director, Phillip Britt. Those were all on-market trades using their own money. Michael Omeros (a NED, i.e. a non-executive director)) also bought 104,558 ABB shares on-market for $2.69/share (so for a total of $281,261.02) in early May this year. All of the directors appear to be also taking rights or options as part-payment for their directors’ fees, creating even further alignment of interests with ordinary shareholders.
• The Telco/ISP sector is rife with M&A activity, and ABB are going to factor into that at some point. Speaking of which, Origin Energy have a white label contract with ABB where Origin bundle energy supply with telco/ISP services which are provided by ABB and there has been talk in the AFR recently (in the “Street Talk” section) about Origin running their eye over Vocus Group’s retail telco business – see here: https://www.afr.com/street-talk/origin-energy-dials-into-vocus-retail-arm-secret-auction-underway-20220831-p5be9x That part of Vocus when combined with ABB (which Origin is already involved with) would likely create a broad full-service Telco if that is what Origin is after, but it does seem to be a bit of a departure from their core energy business. Point is that ABB will factor into M&A in respect of being a target – at some point in the future. It remains to be seen when, and if they are indeed taken over, and by whom. This does not form a basis or pillar on which my investment thesis is based, it's just some potential extra icing on top.

Downside (reasons not to buy, or to be wary)/risks:

• Execution risk – including acquisition risks. So far, the acquisitions that ABB have made – have made sense and have added to the capabilities of the company and expanded their service offering, however you have to keep an eye on acquisitions. You don’t want them to overpay, or make poor acquisitions, particularly ones that don’t make strategic sense or that are biting off more than they can chew.
• Competition Risk – there are other players in this space who could certainly take market share away from ABB or make their continued growth difficult to achieve, including some massive players, however some of this risk is mitigated by ABB having some clear competitive advantages, the main one being their superior customer service and customer satisfaction ratings. And their superior speed to many other competitors. There is still always a risk that competitors chip away at those competitive advantages and manage to overcome them.
• This is a young company who have only just become profitable, so there is no long track record to look back at yet.
• There is either some shorting going on or possibly a larger shareholder offloading their shares, which is putting significant pressure on the ABB share price, so that’s something to keep an eye on, although the flip side is that it does present a good entry point if it is just a temporary phenomenon. 

Potential Positive Catalysts:

• Continued growth and beating market expectations.
• Decrease in churn, which has been a concern lately.
• Positive market updates (upgraded earnings forecasts), and announcements.
• Positive M&A, both as a potential target or an acquirer of strategic assets.
• More broker and analyst coverage.
• Increasing profits and improved margins.
• Eventually, declaring and paying dividends.

Summary:

Aussie Broadband is a market leader in terms of customer service and customer satisfaction and the sharp pullback in their share price presents a great opportunity in my view to enter this company at this still relatively early point in their journey. This is a company that I’ve wanted to own shares in for the last 18 months however they just looked too expensive. They don’t look expensive now. It’s a sector I've had success in previously (UWL and MAQ more recently, previously Amcom, M2 Telecommunications, Vocus and others), and ABB is a well-positioned company within the sector.

Today (Tuesday 6th September 2022) I bought an initial tranche of ABB shares (IRL) at $2.51/share for one of my main portfolios, and I also added them to my Strawman.com portfolio (at the closing price of $2.49/share).

Further Reading:

Aussie Broadband Stung With $213,000 Fine for Breaching Public Safety Rules (msn.com) [2022]

Aussie Broadband net profit rebounds to $5.3M - ARN (arnnet.com.au) [2022]

Aussie Broadband beats the big four at customer service | Aussie Broadband [2019]

Reviews Aussie Broadband employee ratings and reviews | SEEK [current]

Aussie Broadband Reviews | Glassdoor [current]

ABB FY22 Results Announcement and Presentation

The following is from: https://www.intelligentinvestor.com.au/recommendations/aussie-broadband-result-2022/151665?qa=

Growth in the short term may stumble in the face of intense competition. Yet the business has seen off cycles of irrational competition in the past and we expect this time to be no different.

Aussie boasts twice as many customers on top-tier plans as the market. It doesn’t compete on price and churn rates have normalised after spiking for a period. We won't join the panic over short-term discounting.

Expand the core

In the past, we’ve alluded to the similarities between Aussie and another II favourite, Macquarie Telecom. Management has added more credence to that comparison by confirming a pivot from operating as an NBN reseller to focussing on business, enterprise and wholesale products.

This is a similar trajectory to the one taken by Macquarie about a decade ago and should drive higher retention and higher margins. So far, those new segments are working.

The enterprise business, which offers services to business customers, increased revenue by more than 50% and contributed $10m to EBITDA. The wholesale business, which provides white label services to third parties, now boasts 60,000 connections in its first year and is already profitable.

Over the Wire’s voice platform and data service will be crucial in building new products and services. Importantly, a lot of Aussie’s new products will focus on its own infrastructure. There is clearly concern about NBN pricing, from Aussie and more broadly, especially in the short term. 

Lower the volume charge

When the NBN was established, it was required to achieve specific return-on-asset targets. To reach those, it introduced a notoriously unpopular volume charge that lifts prices for everyone as data consumption rises.

That makes high-tier plans more expensive and lower margin than they would otherwise be. With consumption volumes soaring since the pandemic, NBN wholesale prices keep penalising high volume providers. That will continue for another year but, beyond that, it looks like NBN pricing will change.

As we’ve previously explained, the new federal government is looking to change the NBN mandate and lower or abolish the volume charge.

That will be most beneficial to higher-tier providers like Aussie and will help lower prices or lift margins. Negotiations are still underway, but early signs are positive that something might change in 2024.

We also note that Aussie’s long fibre rollout is 90% complete and will conclude this year. That will provide savings on backhaul leases and a base for further fibre expansion.

Aussie has already confirmed it will extend its fibre network to some data centres and to dozens of large buildings. It can then offer higher-margin products that bypass the NBN.

We suspect next year might be a tough one for Aussie. The consumer broadband sector is looking harder, labour costs are rising – Aussie had to spend $7m in additional labour costs – and discounts are rife.

Yet we think those difficulties will be offset by growth in new segments of the business and, over time, improved wholesale pricing will help lift broadband margins.

Fallen expectations

Management expects revenue for next year to be between $800m and $840m, while EBITDA margins are expected to rise to over 10%. We should expect over $80m in EBITDA for the year.

Aussie currently carries $138m in net debt, a figure we would prefer to see lowered quickly. After adding that debt to a market capitalisation of $640m, we come to an enterprise value of $780m and a forward EV/EBITDA multiple of less than ten.

We acknowledge that risks from competition and discounting have risen, that growing new business segments is harder than growing existing ones and that the balance sheet now carries debt. It appears the market has now discounted the valuation it is willing to ascribe to Aussie in light of those risks.

Yet Aussie isn’t some fad or fashion. The business started from scratch in 2008 and, with no obvious advantage, fought off almost 100 competitors to become a force in broadband.

The skill, hustle and determination that build an impossible business is again being mobilised and we are happy to back management to do it again. To account for the risks, we’re lowering our Buy price from $3.50 to $3 and our Sell price from $7 to $6, but Aussie remains a BUY.

Note: The Intelligent Investor Australian Ethical Shares Fund owns shares in Aussie Broadband.

Disclosure: The author owns shares in Aussie Broadband.

By Gaurav Sodhi

[30-August-2022]

IMPORTANT: Intelligent Investor is published by InvestSMART Financial Services Pty Limited AFSL 226435 (Licensee). Information is general financial product advice. You should consider your own personal objectives, financial situation and needs before making any investment decision and review the Product Disclosure Statement. InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.

--- ends ---

For a free 15-day trial to Intelligent Investor (to gain access to more of Gaurav's fine work) - go here: https://www.intelligentinvestor.com.au

Information, images, charts, diagrams, etc. used in this straw were from the sources listed above as well as the following websites: https://www.aussiebroadband.com.au/investor-centre/, https://www.intelligentinvestor.com.au, https://www.afr.com/, https://www2.commsec.com.au/, https://www.choice.com.au/electronics-and-technology/internet/connecting-to-the-internet/articles/internet-service-provider-satisfaction-survey and https://www.fnarena.com/.

18-Sep-2023: Update:

OK, I was confident that ABB had upside one year ago when I wrote the stuff above, and their report in August for the FY23 full financial year was really good.

You can view their announcement here: ABB-FY23-Annual-Results-Announcement.PDF

And their FY23 Results Presentation can be viewed here: ABB-FY23-Results---Investor-Presentation.PDF

The key highlights from their results announcement were:

They provided the following tables to demonstrate their revenue and subscriber (connections) growth:

They also provided the following FY24 upate and guidance:

All very positive - and then, from their results presentation:

And here's something that I don't see too often - not often enough anyway - an explanation of the key risks to the business and it's growth and profitability trajectory (i.e. downside risks) alongside the upside:

However, the overall FY24 outlook remains positive, as detailed below:

Guidance for continued growth, so good numbers which should continue to be good.

The following was sourced from FNArena.com this afternoon:

The following is the FNArena.com summary of the latest update on ABB from OM (on Aug 28th). They believe that MS and Shaw & Partners have both discontinued coverage of ABB, however I've included the most recent calls on ABB by both of those brokers including the dates they made those calls. According to FNArena, ABB is now only covered by just one broker (Ord Minnett) of the 8 major broking houses that FNArena monitor. I view that as a positive actually. The less major broker coverage a company has, the more likely there is some market misspricing (in my experience).

This last slide (from ABB's FY23 Results Presentation) is a major reason why I hold ABB shares. I believe that outstanding customer service and high customer satisfaction (along with positive customer recommendations) are going to continue to result in ABB gaining further market share from Telstra - and to a lesser extent also from TPG and Optus who I believe may have dropped the ball somewhat recently (in the past 18 months or so) in relation to customer service and customer satisfaction.

And it appears that this is one of those rare cases where the market is finally coming around to MY way of thinking. It doesn't always happen, but it's certainly nice to see when it does.

Disclosure: I hold ABB shares.

Aussie Broadband has acquired the NBN customer base of Uniti Group and will start to migrate users from mid next month. The official Uniti release is here. iT News also wrote about it here.

Key details

• Relates to the acquisition of more than 15,000 subscribers
• Concerns Uniti’s entire NBN customer base, including FuzeNet and Harbour ISP. The latter have more than 6000 satellite services as of the last report, so I am not sure what happens to those customers (noting Aussie doesn’t service satellite)
• Migration scheduled to take place between June and July 2023, so should provide some strength to both H2 and FY24 H1’s residential numbers.
• Aussie will honour all existing plans, like the champions they are.
• No mention of how much Aussie paid to acquire Uniti’s customer base. 

Disc - held.

ASX Announcement

3 April 2023

Director share sale

Aussie Broadband Limited today announces that Managing Director Phillip Britt has sold 268,602 shares and will potentially sell up to a further 231,398 shares within the next month. The proceeds will be used to fund tax obligations. The sale and potential future sale in total represents 3% of Phillip Britt’s total holding. Phillip Britt remains a substantial shareholder of the company.

ENDS

The NBN Wholesale Market Indicators Report (December 22 quarter) has been released, and the results are good for Aussie.

Aussie total services

• Sep 22 report – 580,985
• Dec 22 report – 604,951

Key points

• Total NBN services came in at 8.7m, a decrease of 0.1%. With NBN growth stalling, this emphasises that ABB need to capture market share from existing services and justifies their ongoing push towards business and enterprise.
• More of the same – Telstra, Optus and TPG continue to lose market share to smaller players. Who is surprised?! ABB had another strong quarter, but not as strong as Vocus, who picked up 25k services to Aussie’s 24k. Superloop grew their services by a modest 13k. The below chart articulates this better.
• While the 50-speed tier remains the most popular, there was a large increase in the second-most popular 100mbps tier, with almost 190,000 new services. This tier now accounts for over 13 per cent of all services. Customers continue to move towards higher-speed plans -- this is good news for Aussie.  
• Aussie experienced moderate growth across all NBN tiers: 25, 50, wireless, 100, 250, 500, home ultrafast and 1000mbps. The higher tiers are what I am primarily looking for, but the growth across the board is a good sign. On that note, growth in services occurred Australia wide, with increases in all states/territories. This reflects well on their competitive advantage/brand.

In short, Aussie continues to impress. I am going to take a stab in the dark and say they will overtake Vocus and become one of the 'big 4’ NBN providers by March 2023 quarter. 

H1 FY23

Excellent analysis @mikebrisy. I will try not to repeat what you have already mentioned given your already great summaries from the report and the results call. Most of my thoughts are in line with yours, but I would upgrade the categorisation of ‘decent’ results to ‘impressive’. This was a strong half in my view.

The revenue downgrade bothers me little, offset by an upgrade to EBITDA guidance. Like @mikebrisy, I also believe guidance shouldn’t exist. Let businesses do their thing – investors/analysts should be the ones required to forecast this, the burden shouldn’t be on management teams. That said, I think it is safe to say we are losing this battle!

ABB’s acquisition of OTW, while expensive, is starting to bear fruit. They are starting to produce relevant synergies but it has also given them a head start in targeting business, enterprise and government. The margins are higher here too, and there is also the advantage of locked in contracts and more stable revenues.

The recent CapEx increase (dating back a year) looks scary at first. But businesses that make significant investment with five years in mind -- taking short term pain as an option -- should be applauded, despite this often spooking the market. The rationale is there for all to see and now it is just a question of Phil and his team executing, which I believe they will. Like @mikebrisy alluded to, this very investment resulted in share price weakness. But this allowed me to double down and Mike and many others to jump in. It is good that markets react this way (it creates value for us) but my word it is darn short sighted. 

A few quick thoughts of my own.

• Investment thesis well and truly intact: ABB is shaping up to be a dominant player in the residential market – with a strong foothold in the higher speed tier market – and plenty of growth and scale to come as they target business, enterprise, and government.
• Show me the money: operating cashflow up 35% to 30.8m. It is still early days and ABB has lots of growing to do. We are starting to see evidence of what this business can become – a cash generating machine backed by strong management, an impressive brand and a competitive advantage which only continues to strengthen.
• For a more detailed cost breakdown analysis, there was a 65% increase in revenue from 229m to 378m – a difference of approx. 150m. While this occurred, we had employee costs rise 32m, network/hardware costs increase 79m, marketing decrease 1m, admin expenses increase 7.5m and D&A increase 17m – with costs totalling around 134m. This is evidence of scaling. Analysis of cash flows suggests much the same. With all that said, we are likely to see continued improvement to margins as the business targets higher margin segments and leverages its fibre rollout.
• The telco industry is tough, competitive, and crowded. The very idea that ABB can increase their margins while the NBN market is maturing is impressive. This is largely thanks to their fibre project and their push into wholesale, business, enterprise, and government.
• Residential continues to be the backbone behind ABB’s impressive growth. Pleasingly, we saw gross margins continue to increase across the board. We will see much slower growth here in the years ahead, but the important thing is ABB continuing to take a good portion of market share. This is where their competitive advantage (their brand) will do the talking for them and hopefully require minimal marketing/advertisement (which actually decreased in H1).
• Perhaps linking in with both the above points, customer churn was reported at 1.2%. Without being repetitive, this is bloody impressive in the telco industry where competition is rife and cheap discounted deals are commonplace. It also reflects a more mature customer base.
• On the topic of brand, ABB was again awarded the Roy Morgan Most Trusted Brand in Telecommunications. The little things.
• Business, enterprise and government is where ABB will see its future growth/value – higher margins, optionality for upselling and value-add services, and locked in contracts. This really underpins management’s thinking with the OTW acquisition, which provides them IP and SME in this segment.
• Wholesale continues to perform strongly, with almost 16k net new connections, although gross margin % was impacted by an increase in COGS (revenue increase of 129%, while COGS grew 141%).
• OTW: divestment of Fonebox and Zintel NZ operations, which management considered non-core for their strategy. These have since been sold to MaxoTel for 6.5m. The proceeds will be used to repay debt. This deal has also resulted in a newly forged partnership between MaxoTel and ABB for Aussie’s wholesale services (voice and inbound calls). Think looks like tidy business by management.

Disc: held

A few StrawPeople (including me) recognised in the second half of last year that former market darling $ABB was oversold. Today we got the first look at a clean half year of results following the $OTW acquisition.

As reported by @jayjayjayjay , the overall results are decent.

However, some shareholders were clearly spooked with the 4% downgrade in revenue guidance for the FY from $800m-$840m to $780m-$800m, which was headlined by the positive news of an upgrade in EBITDA guidance from $85m - $90m, from earlier guidance of a margin of 10% to 10.5%.

For clarity, the old EBITDA guidance, at the midpoint of the previous revenue ($820m) and EBITDA margin (10.25%) guidance ranges was $84.0m.  So the EBITDA upgrade is +4%. (Honestly, I often wish firms didn't give guidance at all.) 

Shares are down 1% on the day; however, they hit -10% earlier in the session, before the results call.

I'll consider the results through the lens of my investment thesis. First, I am not a fan of the telco sector. However, I am attracted by “attackers” or late entrants to a market with incumbents ripe for disruption ($TLS, $TPG). In the case of $ABB, the thesis is that an agile, customer-focused player, free of legacy infrastructure and systems, can focus on higher margin customer segments by investing in targeted infrastructure and technology to establish a profitable, growing share, defended through excellent customer service.

The Numbers

$ABB were good enough to report the PCP comparison using the proforma combination of $ABB and $OTW, to remove the inorganic consideration in the comparison. (Thanks, guys! This makes up for the muddled guidance.) All my comparisons are therefore on that basis.

Drilling down below the headlines reported by @jayjayjayjay , the EBITDA growth of +86% to $41.1m had two main drivers: 1) network savings (+$9.1m) and growth (+$10.3m). The network savings arise from where NBN backhaul charges are avoided by using $OTW/$ABB's own network backbone, which they are continuing to build out.

Capex: $31.2m was spent in the half with the mix shifting from replacement, upgrading and backbone investments to an increased emphasis on $17.5m growth capex (which means laying network to new customers areas plus actual new customer connections). FY capex was guided to $55.0m, so 2H FY23 number of $23.8m, with clear signalling that peak capex is behind us.

Importantly, the $ABB networks has been expanded to 1,400+ buildings available for connection, which is +320% on PCP.

To meaningfully understand the results it is necessary to consider each of the four business segments in turn: Residential, Business, Enterprise and Government and Wholesale.

Residential: New additions of 30,077 were down on the last half’s 43,000. This is still a healthy +7% on the PCP total, recognising that the overall NBN market is now mature. (Total connections in the market grew from just 8.4 million connections in Jan 2022 to only 8.5 million in December 2022, Source: NBN Co.) Customer churn remained low at c. 1.2%. With revenue rising at 26% and COGS at 18%, Gross Margin increased 49% to $72.0m, with GM% rising from 25% in the PCP to 30%. In summary, while volume growth is moderating, $ABB is still gaining market share concentrated on the high speed premium plans. Operating leverage is driving margin expansion. Residential appears to be in rude health.

Business: New connections here also slowed, adding 4,161 compared with 4,980 in the prior half. This was 11% growth on PCP total connections, and additions were 24% higher than the PCP. Revenue grew on 7% in this segment with COGS up 25%, so Gross Margin was flat at $23.0m and GM% declined from 49% to 46%. I didn’t understand the rationale here which was put down to “Gross margin stable with change in product mix.” The analysts on the call didn’t dig into it, and I wasn’t fast enough on the case to ask a question myself.  So, Business is one to watch going forward.

Enterprise and Government (E&G): Total revenue was flat due to “timing of non-recurring revenue”. However, recurring revenue grew at 5%. COGS actually reduced 7%, so Gross Margin increased 7% to $19.2m, and GM% increased from 49% to 52%.

Wholesale: grew strongly, with revenue up 129% to $49.4m, but with COGS up 141%, Gross Margin increased only 111% to $18.0m. (GM% margin declining from 40% to 37%).

 Cashflow: Net cash from operations increased 34% from $19.2m to $25.8m. Therefore, given the $32.5m investing cash, net cash flow was -$14.1m. Looking ahead, with declining capex, I expect 2H FY23 to be cash flow positive, and for $ABB to turn into a solid cash generator in FY24, as is the consensus view.

Insights from the Q&A Discussion

CEO and co-founder Phil Britt summarised $ABB’s position by stating that “Residential and Wholesale are running strong. Business, Enterprise and Government is now positioned for strong growth.”

Asked to explain the reason for the revenue downgrade, Phil said that they hadn’t quite hit the expected mobile customer additions and that the Origin white label deal was “a bit slow” getting started.

On his bullishness for Business and E&G in H2, Phil said that there was now an integrated $OTW+$ABB team in place and the pipeline is bigger than before. He also pointed out that there is a time lag between signing customers and revenue flowing. He pointed to the first enterprise pilot in Brisbane CBD where they are halfway through standing up 20 new enterprise customers, enable through a focused buildout of the $ABB network. “I’m really bullish about the E&G opportunity.”

On costs, Phil said that headcount will now be steady, with the current team able to drive the next period of growth. Of course, customer support has to scale with revenues, so he was referring to business development and customer onboarding.

On competitive positioning and pricing, Phil said there has been a lot of competitor activity in the lower-tier market, but that they are seeing consistent new additions in their target premium segment. This has continued with a strong January and February also going well. So Phil reported that they are not seeing customer demand falling off. On pricing, competitors have raised prices, but $ABB will hold off until the new NBN determination is in place, hopefully for the start of FY24. He believes this will be favourable for the higher speed plans. Any changes, currently being indicated by ACCC review are likely to be favourable to FY24.

On margins, with the midpoint of new guidance at 10.8%, Phil noted that there would be further benefits from Aussie increasingly using their network as well as well as CVC charges "remaining with tolerances". He indicated that there is some further opportunity for margin expansion. Of course, overall margins will expand if Business and E&G grow faster than Residential.

My Overall Take Aways

Following today’s call, I am happy with the progress and my investment thesis stands, notwithstanding the 27% increase in the value of my holding (RL). Having taken an initial position (RL 2.5% now 3.2%), I was looking today for evidence of progress that would justify increasing this position.

Trading on an EBITDA multiple of 10, $ABB is valued at a 30-35% premium to the sector ($TLS, $TPG).

As it transitions to generating free cash in H2, provided it continues to take market share at strong margins, then this valuation is justified. With declining capex, free cash flow should grow. Operating margins should expand ahead of further improvements in gross margin. Gross Margin expansion should be assisted by a maturing residential sector and the delivery of the CEO’s bullish view on the higher margin business and E&G sectors.

I don't fully understand what is going on the Business and E&G, but with clean numbers for the last half, I will be in a better position to judge at the FY. Given that we are already one-third of the way through H2, there must be a solid basis for Phill's bullishness today!

In summary, the proof point at the FY will be the progress made in Business and E&G, continued progress in Wholesale, even if growth in Residential continues to mature.

For now, I am a happy HOLD.

Disc: Held

ABB released results today.

Outlook looks positive they did reduce their revenue target from $800-820 mil to $780-$800 mil however have increased EBITDA guidance initially at 10 to 10.5% now guiding for $85-90mil suggesting margins around 11% or thereabouts.

ABB continue to take good market share from others and the OTW acquisition looks to be so far really successful with 6mil run-rate synergies implemented (on track for 8-12 mil by FY25). Gross Margins have improved and they are looking very able to target high gross margin contracts with high enterprise customers which is one of the highlights for me.

Balance sheet still has plenty of cash but they are spending a fair bit and is something that will need to be monitored.

Disc - held IRL + SM

The NBN market indicators report has been released, relating to the September quarter.

Key takeaways: 

• The total number of residential services increased by 0.2 percent -- almost 17,000 services.
• The trend continues: Australia's largest telcos continue to lose market share. The 'big 4' (Telstra, TPG, Optus and Vocus) lost 123,000 residential services between them in the quarter. Telstra experienced the largest fall in market share. Note: it will be worth keeping a close eye on the December report; I expect Optus will lose significant market share following the September cyber attack which needs no introduction. 
• Smaller providers meanwhile gained more than 140,000 services in the quarter, increasing their combined market share to 14.2 per cent, up from 12.6 per cent in the previous quarter.  
• You guessed it: ABB and Superloop were the main beneficiaries. Their market share increased by 0.3 percentage points -- reflecting the largest increase of the providers. The thing is though 'other' NBN providers actually lost significant market share (almost 100k services). The difference is ABB and Superloop both bucked the trend. The chart below speaks volumes re: this change. 
• More specifically to ABB, residential services increased from 557k to 581k, an increase of 4.3%. Actual connection increases for ABB were more than Superloop's, but only marginally -- 24k vs 23k increases. 
• ABB increased market share in all areas -- metro, outer metro and regional. Further, customers across all states and territories increased -- that is remarkable. This is important as it demonstrates they aren't largely dominant in one market, but are starting to appeal to the masses countrywide. @mikebrisy discussed it on this very forum last week -- the more ABB customers continue to speak glowingly about their internet provider (ABB) the more we will see the business grow across the country without having to advertise and over-spend on marketing. This is ultimately a competitive advantage.
• 50Mbps speed tier remained the preferred tier option, accounting for just over 50% of all services. Services using NBN's smallest tier (12mpbs) decreased by more than 40,000. About half of these appear to have filtered through to the 25mbps tier, while the rest have elected for higher speeds. In what is good news for ABB, Homefast connections increased from 1.2m to more than 1.3m. ABB do well in this market, so customers increasingly moving to these tiers will only benefit ABB. 

The TLDR of the above is 1) the big 4 telcos continue to suffer, while ABB and Superloop continue to shine, and 2) NBN customers are shifting to higher speeds plans. 

I think the following statement from the ACCC Commissioner is most telling:

“The rate at which smaller broadband providers are gaining market share from the big four accelerated markedly in the September quarter. The smaller providers increased their combined market share by 1.6 percentage points, which is about double the rate of the previous three quarters”

This supports my investment thesis. My view? Australians are sick and tired of being taken for a ride by the major telco providers -- we want better customer service, more reliable connection and stable speeds. This report suggests we are continuing to see this play out. We are witnessing disruption to the NBN industry and in a big way.

Edit: removed date on graph.

I found this very interesting - Australians receiving broadband retailers' advertised download speeds more often | ACCC

ABB one of the worst for actualy achieving the speeds advertised in their plans. I understand that they advertise higher speed plans than others but pretty damning. Looks like the main drivers of their success is marketing and the ability to pick up the phone with Australian call centres.

I'm not sure if that makes ABB a weaker or stronger investment case really - if you can still change public perception that you're better despite being much of the same peformance wise? It does show that better service can be a selling point.

Thanks to an article by Lachlan wirting for A Rich Life for highlighting.

ABB up 4% today on back of investor day info. Reaffirmed its guidance for FY23

There has been a steady increase in shorts over the past 3 months.

My initial thoughts are:

·     competition is strong in the business space

·     a "doubt" they can reach the target of 1 million retail customers.

I think they can achieve the retail customer goal as customer service and the Optus debacle should carry them through. Although there is some interesting bundling going on now with CommBank, offering internet discounts with CC payments and mortgages. There are also bundles with utility companies available. Perhaps price will become more important consideration for customers?  More and Tangerine also seem to be nimble, customer focused operators, that could nip at ABB’s customer base.

The business side is not so easy to quantify. To me, their image is of a retail brand that will need to be expanded on to win enterprise business. There is competition on all fronts, big and small, TLC, SLC, etc. I haven’t yet decided if the OTW acquisition adds real value or was just adding/buying customers.

I’m also wondering if the value of their fibre is not being fully appreciated.

Looking forward to the investor presentation tomorrow for some clarity on the above.

Held, potentially looking to add at some point.

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

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.

I think the market punishment on ABB's not as good as expected customer acquisition numbers is overdone and this is a chance to top up.

My view is that the market is clearly discounting the potential for the fibre backhaul installation that ABB are continuing to rollout to bring in high margin enterprise customers, and treating the stock like a mere reseller.

Happy to top up.

Disc: Held, and a happy customer

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.

The ACCC recently released their NBN data for the March 2022 quarter. Between Dec 21 and March 22, ABB continued to take the majority of NBN connections. As a whole, the data suggests consumers are walking away from the dominant players; instead they are electing to take out connections with smaller providers. The graph below shows ABB's dominance with respect to the recent quarter.

Im unsure whether i like this follow up announcement by ABB. All it shows to me is management being influenced by share price movements. This announcement today is a rehash of some of what they already announced. I thought yesterdays update was generally positive and in the long run a 20% fall will mean nothing if the company continues to execute. My message to ABB managemtlent is focus on execution and dont worry about pandering to market sentiment.

I did sell out my position on friday (pure luck on the timing), not because i dont like the business but because i thought the price was fully valued and i wanted some more cash buffer. But this announcement today kind of makes me roll my eyes.

Good lord -- i agree @Maaxweell , that's a brutal reaction!

As recently as March 23 they were calling for underlying EBITDA to be between $27-30m (see slide 27 here), and today they narrowed that to between $27-28m (see here). At the midpoints, that a reduction in guidance of 3.5%.

Sure, it's not great news, but does it make the business 24% less valuable!? Especially with a 42% YoY lift in total services and increased market share (in a largely mature market).

I suspect it is in part due to the fact that shares were priced for particularly strong growth, and the market is presently in no mood for anything that undermines such expectations -- even just a little.

There was also an 18% lift in the CVC expense, and the company seems to be facing difficulty in recruiting staff (which may point to higher wage costs going forward?).

I've not looked closely before, but on some rough numbers: Adding in OTW, you have a business on a EBITDA run rate of roughly $60m. Prior to today, the business was valued at about 22x that (probably around 50x underlying earnings). After the drop, the business is on an EBITDA multiple roughly 17x. Let's call that a forward PE (accounting for a FY contribution from OTW) of roughly 34.

With some threat to margins and the business needing to win share of incumbents to grow, perhaps that's reasonable? Could this be a case of the market simply getting ahead of itself prior to today's very decent update?

I'm not sure. Just throwing out some early thoughts

Have I missed something?

ABB announced a quarterly trading update which shows strong growth across the different service lines. And advised they expect EBITDA to be basically in line with the EBITDA they estimated from the H1Y22 update.

Yet the price has fallen 22% at the time of writing..!

I'll admit I haven't been following this stock that closely, and have not read into the OverTheWire acquisition, but I am pretty confused by the markets reaction here. Would love to hear someone else's opinion.

I did miss the huge director sales in March, if I saw that I would have cashed my full strawman position out instead of the small sale I made.

Disc: Held in Strawman only

Phil Britt – ABB’s Managing Director – recently spoke at the AusNOG (link here). The presentation mainly references the fibre rollout, in addition to a general overview of business activity over the last five years. It provides insight into how much the company has matured over that time.

Can report from first hand experience that customer service has continued to excel and wheels have not fallen off the wagon with the ASX listing like with iiNet.

My area has become eligible for a FTTP upgrade so I signed up, or thought I did. Aussie gave me a courtesy call to check on on me, I say I've already put in the order online, except they couldn't see it on their computer.

So a few days pass, and the same customer service agent (I'm gobsmacked already) calls me again today, following up because he's checked again and nothing has gone through, and he wants to help to make sure I get what I thought I had ordered.

This is how a customer centric operation should be, and the word of mouth not only keeps customers planted in a notoriously easy to switch market, but attracts new ones.

Very happy to keep holding Aussie Broadband as a shareholder, and as a customer

The thing I like about ABB and OTW is they are customer-focussed. A rare thing. And aligned. Eventually other companies will catch on but probably 20 years from now. Old school. It's not that hard to care

Synergies. If you don’t have them the deal just cannot be done. Thankfully, the acquisition of previously listed Over The Wire (OTW) is expected to generate annual cost synergies from $8 million to $11 million within three years. Sweet.

ABB has acquired OTW (with the deal closing mid March) for $344M adding about 16,000 customers across business, enterprise, government, and wholesale. It also means an additional 1,000 in the team.

OTW team brings voice skills as well as those in both cloud and security.

“One of the key benefits with Over the Wire’s cloud offering is that they own all the infrastructure, either in their own data centre in Brisbane or in third party data centres nationally,” said Phillip Britt, the newly CEO Magazine* crowned Managing Director of the year.

OTW CEO, Michael Omeros will join the ABB board.

The deal was funded by ABB $114M share placement from September last year which was put forward for mergers and acquisitions.

*I'm always a skeptic of awards such as these, especially where you have to nominate yourself, however, in this case it looks like there is a reasonable voting panel 

It always amazes me how brands can be built selling what is essentially a commodity product. ABB has done it though through providing something simple - customer service.

Was talking to my manager recently and he mentioned he's an ABB customer and that he would tell anyone about them whenever they asked. It doesn't get better than that.

The proof is in the pudding too. Market share continues to be picked up in the reporting period shown Aussie Broadband took 56% of net new connections.

On the back of this, the share price had run up hard, so make your own decision if now is the time to buy.