Goldman’s Contrarian View On Telco Challengers

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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).

Aussie Broadband

Jarden also initiated coverage of Aussie Broadband late last month with an Overweight rating, while Citi initiated mid-month with Buy. Note that in Jarden’s five-tier rating system, Overweight is one notch behind Buy.

Only the absence of a near-term catalyst prevents Jarden from initiating with a Buy rating, such is the broker’s positive view of valuation, structural tailwinds and the company’s strong track record of capital management. Aussie Broadband should continue to invest for growth, both organically and via M&A, while committed to balance sheet settings consistent with its net leverage target ratio of 1.75-2.50x.

As of end-FY24, that was 0.7x, Jarden notes, providing significant headroom for investment and/or capital return to shareholders. As a result, the broker forecasts an FY25 dividend of around 8cps and expect an 18% compound annual dividend growth rate through to FY33.

Aussie’s investment in Buddy Telco is a key watchpoint into the first half FY25 result, Jarden suggests, with some -$10m in opex to be invested in the brand across both FY25 and FY26

Increasing market share, with focus on expanding network infrastructure, comprehensive offerings and value proposition, underpin Cit’s positive view on Aussie Broadband.

While Aussie is the fourth largest retail service provider in Australia, it is the third largest when it comes to higher speed plans, Citi notes, demand for which should increase progressively. In comparison to the majority of larger peers, Aussie Broadband’s retail prices are attractive particularly considering it owns its fibre network.

Further, there are no legacy operations that may hamper the growth profile and efficiency. Customer service is what also sets Aussie apart, in the broker’s view. All these factors should translate to Aussie Broadband continuing to outpace NBN market growth, Citi believes.

Not recently updating on Aussie Broadband are Ord Minnett (Buy) and Morgan Stanley (Overweight). UBS initiated coverage in September with a Neutral rating, upbeat on the stock but citing upside already priced in, while in October, Wilsons (Market Weight) noted there could be some “sticker-shock” as Origin Energy’s growth rates come out.

We recall that Superloop stole Origin from Aussie Broadband.

Goldman Sachs has initiated on Aussie with a Neutral rating, which reflects general caution regarding telco challengers offset by what Goldman sees as valuation support.

Goldman Sachs’ price target of $3.80 sits towards the bottom end of the range of $3.62 (Wilsons) to $4.42 (Ord Minnett).

Megaport

Following Megaport’s ((MP1)) AGM in late November, Goldman Sachs lowered its target by -13% to $10.40, citing FY26 revenue growth guidance expected by management only to be in line with FY25. This followed significant investment in products and employee hires, with the company not yet experiencing an uptick in revenue growth, with Goldman Sachs attributing the issues to pricing challenges.

The broker nevertheless retained a Buy rating.

The guidance update sparked a rash of target downgrades from brokers, although all of Canaccord Genuity, Macquarie and Citi maintained Buy or equivalent ratings.

UBS retained Neutral, emphasising the need for tangible evidence of an improved financial outlook before incorporating higher revenue growth assumptions into forecasts. Disappointed in FY26 guidance, Ord Minnett downgraded to Hold from Accumulate while Morgans (Add) has not updated since August.

Last week, Goldman Sachs cut its target for Megaport by a further -23% to $8.00, given concerns around the lack of progress the company has made on improving its revenue and customer trends over the last 18 months, evident in the subdued FY25 guidance and FY26 expectations. Goldman downgraded to Neutral from Buy.

Goldman Sachs’ new target of $8.00, while a significant cut, matches that of Ord Minnett. Megaport has long been a volatile stock in terms of share price movement, and this is also reflected in a wild range of broker targets.

Goldman Sachs and Ord Minnett are the low markers on $8.00, but targets range all the way up to Citi’s $16.05.

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