What doesn’t the market understand about Aussie Broadband’s strong growth?

Having watched the company’s value shed over -60% of its value since April, seemingly over the market skepticism surrounding future growth, shareholders in Aussie Broadband (ASX: ABB) watched the share price jump 5% at the open after the telco posted a 4.6% jump in first quarter revenue.

The company's first quarter FY23 revenue reached $184.4m, up $8.1m on fourth quarter F22 and management reaffirmed its FY23 guidance of revenue between $800m and $840m.

Based on planned growth in its higher margin business, enterprise and government customers, and the full year benefit of the Over the Wire (OTW) acquisition, management expects to deliver earnings (EBITDA) margin (excluding integration costs) of 10-10.5%, up from 7.2% in FY22.

Goals

Despite the stock’s seemingly undeserved dismal share price performance this year, chairman Adrian Fitzpatrick reminded shareholders attending today’s AGM that Aussie is in fact a growth stock with FY22 residential broadband revenue up 36%, earnings (EBITDA) up 39%, while the business segment grew revenue by 54% and earnings (EBITDA) by 62%.

Fitzpatrick reaffirmed the company’s goal of becoming the fourth largest provider of communications and technology solutions in Australia.

Highlights with the company’s first quarter FY23 trading update included:

• 610,098 broadband services, up 25,305 or 4.3% at 30 June 2022

• 6.73% NBN market share, up 27 bps from 30 June 2022

The company noted that while wholesale & white label business was lower, due to white label customer internal platform changes, mobile grew strongly off the back of new marketing strategy and changes to plans.

ABB residential and business also delivered consistent net adds compared with the FY22 despite strong price-based competition, leading to improved margins, lower cost to acquire, and reduced long-term churn risk.

Why is the market not listening?

When comparing Aussie’s share price to the company’s FY22 achievements, it easy to conclude that the market has struggled understand the company’s business model.

For the uninitiated, Aussie has typically targeted high-value customers willing to pay more for higher speed. Around 40% of the company’s user base choose plans that cost $100-plus a month.

As a result, average revenue per user (ARPU) at $80 a month sits at an industry highpoint.

What the market appears to either misunderstand or is weary of is the company’s pursuit of lower broadband growth in favour of new lines of business, notably growth in enterprise and government services.

To put the market’s perceived risk over Aussie’s strategy in context the company trades on an EV/EBITDA multiple of less than 8x.

FY22 achievements

• Over the Wire delivered $5.2m of annualised synergies

• White label solution and onboarded over 58,000 broadband services

• Upgrades to core network equipment allowed Aussie to scale past 1m broadband services

• Completed the fibre network rollout to the 83 NBN POIs, 22 data centres and 77 multi-storey buildings unlocking significant operation savings

• Expanded offering to business, enterprise & government and wholesale segments with cloud, security, managed services and expanded voice solutions

What brokers think

Consensus on Aussie is Strong Buy.

Based on Morningstar’s fair value of $6.49 the stock is undervalued.

Based on the two brokers that cover Aussie (as reported on by FN Arena) the stock is trading with 62.4% upside to the current price.

While Aussie guidance assumes a heightened competitive environment will be maintained over FY23, Credit Suisse notes any withdrawal of discounts from competitors could provide upside risk.

The broker maintains an Outperform rating and the target is reduced to $3.70 from $4.80.

Ord Minnett expects more than 50% of the FY23 group earnings (EBITDA) to be generated in the business segment and retains a Buy rating, target is lowered to $4.03 from $4.69.

At the current scale, Intelligent Investor expects the broadband business alone to double earnings (EBITDA) to almost $60m, assuming margins of 6% and ARPU of $80/month.

The fund manager recommends buying in below $3 and selling above $6.

Aussie Broadband share price over six months.