Treasure Chest | Mar 11 2022
This story features AUSSIE BROADBAND LIMITED, and other companies. For more info SHARE ANALYSIS: ABB
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. JP Morgan assesses the impact of Origin Energy’s broadband plans for Aussie Broadband.
By Mark Woodruff
Whose Idea Is It?
Analysts at JP Morgan.
Telecommunications company Aussie broadband ((ABB)).
Origin Energy ((ORG)) plans to become the lowest-cost provider in the energy retail market as well as offering ancillary services such as broadband.
JP Morgan estimates an increase of around 550,000 subscribers in the retail broadband market over the next four to five years would be required to meet the company’s new target of 600,000 subscribers by FY26.
Given Origin Energy white labels Aussie Broadband’s service offering, the broker expects a material positive impact for the latter. Indeed, the target of 600,000 (6% of the market) exceeded by 700% the analysts’ white label forecast for Aussie Broadband.
Should the target be achieved, the broker estimates a 44% lift to the net present value (NPV) of the company and a 40% lift to the broker’s FY26 earnings (EBITDA) forecasts. If only 50% of the target is achieved, there would still be a 19% lift for NPV.
After incorporating Origin’s targets and assuming no cannibalisation of the company’s existing retail business, JP Morgan estimates 1.5m total subscribers for Aussie Broadband.
The analysts feel the company, which supplies broadband services to both residential and business customers, has a strong competitive advantage in comparison to incumbents.
Despite the exciting prospects for Aussie Broadband, JP Morgan, not one of the seven brokers updated daily on the FNArena database, retains its $5.85 target price. However, a $8.42 valuation is estimated, if the potential 600,000 customers via Origin Energy are included in forecasts.
Following better-than-expected first half results in the last week of February, JP Morgan noted Aussie Broadband’s residential subscribers continue to grow, and sales in January and February were at record levels. It’s thought management guidance was conservative.
The broker noted that operating expense savings will kick in for residential, with the completion of the 1,200km fibre build. In addition, management pointed to $6m in potential synergies from the acquisition of Over the Wire Holdings ((OTW)), which involves transferring customers to fibre.
Ord Minnett also pointed to better-than-forecast first half results that were supported by widening gross margins. The company was believed to be in a strong position to fund the cash component of the Over The Wire acquisition and still retain cash for growth. The broker raised its target to $5.65 from $5.61.
Meanwhile, Credit Suisse noted trends were strong and anticipated 6.5% NBN connection market share by the end of FY22. An Outperform rating and $5 target price was retained.
The consensus target price in the FNArena database is $5.32, which corresponds with the latest share price.
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