Strong Growth Underpins Superloop Optimism

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Superloop management has raised FY24 earnings guidance and confirmed the Origin Energy customer transition is on track. Analysts see additional growth opportunities.

-Record breaking growth for Superloop’s Consumer segment
-Management raises FY24 earnings guidance
-Transition of Origin Energy customers on track
-Canaccord Genuity highlights additional growth opportunities

By Mark Woodruff

Superloop ((SLC)) has reported record-breaking growth in its Consumer segment for the half-year ending June 30, building upon a strong first half FY24 performance. Earnings, net subscriber growth and the transition of customers from Origin Energy ((ORG)) are all exceeding analysts’ expectations.

Management is now expecting FY24 earnings at the top end, or above, the previously guided range of between $51m-$53m. This range compares to the $52.5m expected by consensus, notes Morgan Stanley. FY24 capex guidance for between -$25-27m was also reiterated.

In a key milestone within Superloop’s three-year growth strategy, management signed an exclusive six-year contract in mid-March to provide wholesale broadband internet services to clients of Origin and its subsidiaries.

Once 130,000 of Origin’s subscribers are fully transitioned, Superloop’s management (at the time) expected at least an additional $19m of annualised earnings. The company’s share price has responded by rallying by 53% since the announcement compared to a -3.5% fall for the Small Ordinaries Index.

Superloop operates a fibre-optic cable network across Australia, Singapore, and Hong Kong, and offers high quality and competitively priced Consumer and Business broadband, explains Canaccord Genuity.

Back in June 2022, the company positioned itself as the pre-eminent emerging Wholesale partner in Australia by acquiring Acurus, which was known for its white-label capability.

Apart from Origin Energy, recent contract wins in Wholesale include major energy retailer AGL Energy ((AGL)), notes Canaccord, highlighting Superloop’s white labelling platform advantage over peers.

When announcing the deal with Origin, Superloop CEO Paul Tyler noted “Australia’s energy retailers are investing heavily in product bundling, and we are very pleased to be the partner of choice for reliability, service and value.”

The trading update

Consumer customers ended at 322,900 implying net additions of 45,700 in the half compared to 34,100 in the first half, or 16,000 organically in the second half.

This 34% half-on-half acceleration in subscriber growth occurred despite a slight dip in headline Consumer subscriber growth in the second half of FY24, explains Canaccord.

These numbers show the tailwind Superloop experienced from the conversion opportunity created from the NBN’s special access undertaking (SAU) pricing changes, explains Wilsons, which were implemented in November 2023.

While this tailwind from the SAU is largely complete, Wilsons still expects Superloop will continue to gain NBN market share because of consumers switching to budget brands due to the cost-of-living crisis.

For broadband, figures for the five months to the end of May show 26,000 net new customers compared to the previous six month best of 28,000 in the December 2023 half.

While this current half could be the strongest ever half of net additions, Wilsons cautions over an upcoming slowdown as the conversion opportunity created from the November 2023 NBN SAU pricing changes will likely subside.

Canaccord’s investment thesis for Superloop is strengthened by the trading update, and the analysts expect a modest increase in consensus earnings forecasts (from $52.5m) for the next 12 months.

In JP Morgan’s opinion, the update reflects the company’s brand refresh, re-investment in marketing and strong multi-brand strategy.

Recent updates have continued to exceed this broker’s expectations on consumer growth. JP Morgan suggests this signals a structural improvement in Superloop’s ability to acquire and retain customers.

The Origin Energy transition

The transition of existing Origin customers remains on track for completion this October and Origin’s broadband customer base has grown to over 150,000 from 130,000 since the March 13 signing of the six-year deal.

Based on the 130,000 number, Canaccord assumes 25% growth in Origin broadband subscribers in FY25. It’s felt this target is achievable because of the 15% growth to 150,000 subscribers in around three and a half months.

Given October completion, this broker notes there should be four months of partial contribution to FY25 results by transitioned customers and eight months of a full contribution.

Origin has reached “go live” with Superloop, and from July 2, new Origin home broadband sign-ups will be serviced by Superloop.

Growth opportunities

Balance sheet strength allows management to pursue acquisitions, notes Canaccord Genuity, as well as capital investment into smart communities. The latter provides an extremely sticky customer base and has historically resulted in high levels of return.

The average target price of two covering brokers monitored daily by FNArena is $1.58, suggesting around 5% upside to the current share price. It should be noted Morgans is yet to refresh its forecast for the trading update this week.

The business is now well capitalised, increasingly free cash flow (FCF) positive, and has a strong track record in growing its consumer business and signing largely wholesale deals that will allow Superloop to monetise its fibre and network assets, JP Morgan assures.

Given the strong operating momentum in both Superloop’s organic consumer business and progress with the Origin contract, this broker retains an Overweight rating.

Both Morgan Stanley and Morgans have Buy (or equivalent) ratings.

Outside of daily monitoring, Wilsons, JP Morgan and Canaccord Genuity have Buy (or equivalent ratings) and their average target price is $1.79.

Following the trading update, the Canaccord target rose to $1.86 from $1.77 and the JP Morgan target was increased to $1.90 from $1.60, while the Wilsons target is now officially under review.

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