Has the recent selloff put Aussie Broadband into compelling buy territory?

A 3.74% jump in Aussie Broadband's (ASX: ABB) share price today, on the back of no news, suggests that the market is starting to recognise that the national carrier of telecommunications services may have been harshly sold off following its recent third quarter update.

The share price rapidly shed around 44% between late April and 20 June after the third quarter result which - reported total broadband services for the quarter were up 11% – was also accompanied by tightened full year earnings guidance to the lower end of range, now guiding to $27-28m, down from $27-30m or -3.5% at the midpoint. 

Another revelation the market clearly didn’t like during the third quarter announcement was a projected cut in broadband connections guidance 580-585,000 from 580-590,000.

This implies 30-35,000 connections in the final quarter compared to 37,000 in the third quarter.

Sell-off over cooked

Having concluded that broadband trends remain supportive of growth, Credit Suisse concludes that the recent sell-off was overcooked and retains an Outperform rating and target price of $5.00.

Credit Suisse is one of two brokers – the other being Ord Minnett - which collectively (as reported un by FN Arena) have a target price of $5.05, a 48.5% upside to the current price (03/05/22).

Ord Minnett likes the fact Aussie Broadband - according to the NBN wholesale Market Indicator Report for the March quarter - continues to grow broadband market share at the expense of peers.

The broker points out a sizeable shift towards higher-margin, higher-speed tiers for all telco companies, and maintains a Buy rating and $5.10 target price. (23/05/22).

Headwinds

Having concluded there are significant gains ahead for the Aussie Broadband shareholders, analysts at Jeffries recently upgraded the stock to Buy from Hold.

Even after cutting its forecast for total broadband subscriptions to 586,000 (from 595,000), the broker’s target price at $5.00 still matches that of above-mentioned Credit Suisse and Ord Minnett.

Jeffries expects recent acquisition, Over The Wire (OTW) to assist in future growth, but with broadband connections currently facing headwinds, the broker doesn’t expect to see any material impact for at least another year.

What’s to like about Aussie

Having listed on the ASX 16 October 2020, Aussie currently sits a little outside the S&P/ASX300 (323) with a market cap of $820m.

Since then the company has grown its NBN market share to 6% from 1.5% by winning new – for the most part – high-value customers.

The company expects to generate earnings (EBITDA) of around $38m for the full year, which includes only a few months of earnings from the OTW.

Aussie bought OTW for $390m late October 2021.

To the uninitiated, OTW is a Brisbane-based telecommunications and IT solutions provider, which offers offer tailored solutions to high-end business customers.

What’s in store

Even if Aussie fails to add another major client, Intelligent Investor sees OTW generating earnings (EBITDA) of $30m next year too.

To that, the fund manager also adds savings from completing the company’s fibre backhaul build, which is expected to add $15m to earnings.

As a result, Intelligent Investor expects Aussie to generate at least $75m in earnings (EBITDA) next year.

Ongoing opportunities

Based on an enterprise value of $850m – equating to EV/EBITDA multiples of 11x next year’s earnings, the fund manager expects net profit of $40m-$50m and a forward price-earnings ratio of 16.

“Aussie routinely captures 4 or 5 out of 10 new connections to the NBN, and we expect the share to close in on 10%,” the fund manager notes.

“There are also opportunities in new products, utilising its fibre infrastructure, and new capabilities from OTW, including cloud services and security.”

While Intelligent Investor reminds investors prices may have further to fall, for the long-term investor, the fund manager is upgrading Aussie to Buy (below $3.50 and Sell above $7.00).

Aussie Broadband share price: A 12 month snapshot.