Goldman’s Contrarian View On Telco Challengers

Small Caps | 10:00 AM

Analysts are upbeat about the progress and prospects for telco challengers Superloop and Aussie Broadband but Goldman Sachs begs to differ.

-Buy ratings dominate for Superloop, Goldman Sachs on Sell
-Mostly Buys for Aussie Broadband, Goldman Sachs on Neutral
-Downgrade to Neutral for Megaport

By Greg Peel

Following completion of the National Broadband Network (NBN) roll-out last year and finalisation of its regulatory pricing framework, the outlook for the Australian Fixed Telecom market is more stable and certain, Goldman Sachs suggests. However, profitability remains challenging given rising NBN access costs and elevated competition.

This is being driven by challengers such as Vocus, Aussie Broadband ((ABB)) and Superloop ((SLC)), alongside competitors from other industries such as Energy and Banking that benefit from the more commoditised NBN product and look to reduce churn and customer acquisition cost of their primary customers.

Back in March, Superloop signed an exclusive six-year contract to provide wholesale internet services to Origin Energy ((ORG)), marking the end of its white label agreement with Aussie Broadband. The deal will see Superloop migrate Origin's 130,000 broadband customers onto its own network in the 2025 financial year.

Vocus was acquired by a Macquarie-led ((MQG)) consortium in 2021, having rejected an earlier takeover offer from AGL Energy ((AGL)).

Along with competition, technological evolution and ongoing fibre deployments across Australia are driving price compression in the fixed Enterprise market, Goldman Sachs points out. Reflecting these challenges, the recent step-up in promotional activity from AGL/Vocus, and the broker's view that Telstra ((TLS)) will re-focus on stabilising subscribers in FY26, Goldman Sachs has a cautious view on the earnings outlook for the sector.

Superloop

Late last month, Jarden and Citi both initiated coverage of Superloop with Buy ratings.

Jarden likes the challenger telcos as they continue to take market share from the incumbent operators. A positive view of the broader operating environment is shaped by three structural tailwinds: NBN Co's 'Fibre Connect' program facilitating the upgrade of some 3.1m subscribers to higher speed tiers; NBN Co's new pricing model bifurcating the customer, further facilitating a push towards higher speed tiers; and Services in Operation growth at the market level, driven by increased building activity and penetration across small businesses onto consumer grade plans which Aussie Broadband and Superloop should win, in Jarden's view.

Jarden sits 6% above Superloop's FY26 earnings ambition, with the Origin Energy contract the material balance. Consensus appears anchored to the ambition which the broker expects will be upgraded.

Origin is targeting around 600k broadband subscribers by the end of FY26, yet Jarden remains conservative on growth. This assumption still has Superloop bridging the FY26 earnings ambition in the wholesale segment alone.

In the consumer segment, Jarden expects Superloop to continue taking market share and forecasts a 14% compound annual revenue growth rate to FY33 supported by both market share gain and the consumer's shift towards higher speed tiers. Given competition intensity, Jarden expects gross margins to tighten.

Near term, Jarden prefers Superloop in the space, given earnings upside not priced in by the market.

Telco challengers have reached 19% market share in Australia, Citi notes. The key question is whether challengers can continue to take market share. One of the key differentiators is pricing and Superloop is competitively priced even amongst said challengers.

Furthermore, Superloop boasts superior latency and speed performance. Citi sees challengers taking market share from incumbents and Superloop is well placed to outperform amongst challengers. The broker's analysis of various markets abroad and the DSL (digital subscriber line) market in Australia pre-dating NBN points to market share growth for challengers.

Superloop has noted this could be around 30%. Citi thinks risk is likely to the upside.

Subsequent to these two initiations of coverage, Superloop last week announced the acquisition of Uecomm, which adds over 2,000km of high-capacity fibre assets, including 800km of owned duct, across Sydney, Melbourne, and Brisbane.

Benefits of the acquisition include improved margins from moving clients to owned infrastructure, expanded product opportunities in wholesale and business segments, and enhanced readiness for Smart Community developments, suggests Wilsons (Overweight).

Canaccord Genuity (Buy) is similarly impressed.

Also covering Superloop but not recently updating are Morgan Stanely (Overweight), UBS (Buy) and Morgans (Add).

Which is why Goldman Sachs' initiation of coverage of Superloop with a Sell rating rather swims against the tide.

While both Superloop and Aussie Broadband have delivered strong NBN share gains, are executing on similar strategies -- earnings diversification and M&A -- and have solid forward earnings growth profiles, Goldman Sachs' Sell rating on Superloop reflects both a cautious view on the sector's earnings outlook and current trading multiples that look "expensive" versus peers.

The broker estimates an FY26 enterprise value to earnings ratio of 11x for Superloop, ahead of the A&NZ telco peer median of 8x, noting Superloop's earnings come with greater customer concentration risk, and Superloop's enterprise value is similar to key peer Aussie Broadband, despite consensus FY30 earnings forecasts 32% greater than Superloop's.

Goldman Sachs' $2.10 price target for Superloop compares with other targets ranging from $1.90 (Morgans) to $2.52 (Canaccord).