Small Caps | 10:00 AM
While FY25 results and FY26 guidance from Aussie Broadband pleased analysts, a newly announced wholesale deal takes centre stage.
-Aussie Broadband ‘beats’ on FY25 and FY26 guidance
-Broadband market share set to jump on new wholesale deal
-Cost and productivity gains, loss-making Buddy sold
-Valuation discount to Superloop excessive, says Wilsons
By Mark Woodruff
FY25 results for Australian telco challenger Aussie Broadband ((ABB)) beat market expectations, with FY26 earnings guidance signalling a substantial step up from the year past.
Adding further momentum, management announced a significant new wholesale agreement with two challenger telcos and confirmed the divestment of the company’s loss-making budget brand, Buddy.
Jarden adds the financial update equally featured stronger-than-expected cost and productivity discipline.
Management removed -$11m of staff costs no longer required for revenue-generating activities (stranded labour) and delivered $6m of Symbio synergies.
Aussie Broadband is positioned as a customer-centric integrator, sitting on top of the National Broadband Network (NBN) foundation, and augmenting its market positioning with its own network assets and services rather than bypassing the NBN.
The core business spans multiple segments: Residential (broadband internet for households, often bundled with VoIP phone and mobile plans), Business/Enterprise & Government (connectivity and managed network solutions for organisations), and Wholesale services, which provides network and voice services to other telcos and partners.
While Residential broadband accounted for about 57% of FY25 revenue, management is steadily diversifying: business and enterprise clients contributed circa 17% of revenue in FY25, and wholesale/voice operations (including Symbio) make up a growing share.
While the company ranks as the fourth largest retail service provider (RSP) in Australia overall, it is the third largest for higher-speed plans, where demand is expected to grow steadily.
FY25 results
Analysts at Wilsons highlight broad-based growth in FY25, with Residential, Business and Government & Enterprise all growing between 11-16%, while Wholesale grew 23% and Symbio was flat (pro-forma).
Macquarie points to the strength of Aussie’s core Residential business from NBN churn, with Residential gross profit growth of 15% year on year, with other segments performing relatively in-line.
Also, the earnings contribution from Enterprise & Government is beginning to reflect recent investment. This segment is seen as a key growth pillar going forward by Ord Minnett.
Underlying earnings in FY25 for all three segments combined grew by 14.7% on FY24 to $138.2m, the top end of the guidance range, with management citing diversified segments and products as the foundation for 18.7% revenue growth.
Underlying profit (NPATA) rose by 6.5% to 55.8m.
FY26 earnings guidance for between $157-$167m implies an increase of 13.6-20.8% on FY25.
Capex in FY26 will be between -$55-$60m, which at the midpoint is -$19.5m lower than in FY25, likely due to excess capacity becoming available on the network following the migration of Origin Energy ((ORG)) whitelabel customers, suggests Wilsons.
Other FY25 highlights include 788,000 broadband connections across the group, a rise of 104,000 from June 2024, along with a 35,000 increase to 216,000 customers in mobile services.
New Wholesale agreement
The new wholesale agreement announced by Aussie Broadband is a six-year deal to provide NBN network services to More Telecom and its jointly operated company, Tangerine Telecom.
More will migrate its network across to Aussie Broadband from Vocus Communications, set to complete in 2H FY26, with a meaningful contribution to Aussie’s earnings crystallising from FY27.
As the new agreement potentially fills the void left by the loss of Origin Energy as a major wholesale customer (that deal was scooped up by competitor Superloop ((SLC)) in 2024), the broker is upbeat around Aussie’s growth trajectory particularly given More’s exclusive partnership with CommBank ((CBA)) which owns around 40% of More.
Management expects the agreement to contribute circa $12m of annualised underlying earnings (EBITDA) based on 290,000 connections.
During FY25, Aussie attained an 8.4% broadband market share of on-net NBN services.
At 8.4%, Wilsons notes by adding the More/Tangerine broadband subscriber numbers, that market share will approach circa 11%, fast approaching Optus at around 13%.
Given the potential for More/Tangerine’s growth over time, the analysts suggest the Aussie one-year forward EV/EBITDA valuation multiple of 8.7 times should begin to approximate Superloop’s multiple of around 13.2 times.
Put another way, the valuation discount to Superloop is seen as excessive given the More Telecom contract provides a similar growth opportunity as was the case with the Origin Energy contract.
Macquarie agrees the new Wholesale win is a re-rate catalyst, suggesting further share price upside from a multiple re-rate. This broker sees scope for further customer additions and notes enhanced diversification.
Speed changes & Aussie vs Superloop
Citi believes Aussie is likely to be a net beneficiary of upcoming speed changes to be implemented in mid-September which should more than offset headwinds from elevated churn after widespread promotions across the industry.
In anticipation of these changes, Aussie launched its “Pro” range of services last August for 250/100, 500/200 and 1,000/400 (download/upload, Mbps) speed tiers to build both brand and awareness.
UBS recently noted both Aussie and Superloop offer defensive cash earnings growth at attractive growth-adjusted valuations, making them suitable to hold both in a portfolio.
On this broker's valuation metrics, Aussie Broadband and Superloop are similarly priced, but UBS now reverts back to favouring Superloop, citing the competitor's stronger organic growth and upside from Smart Communities.
In FY25, leverage decreased by -0.2 times to 0.9 times, well below Aussie management’s target of between 1.75-2.50 times. Macquarie believes balance sheet deployment into M&A is possible. This is why an expansion of the existing share buyback is considered unlikely.
The board declared a final fully franked dividend of 2.4 cents.
Aussie Broadband further explained
Aussie’s fixed-line internet is primarily delivered via the NBN and certain alternative fiber networks (e.g. OptiComm), complemented by mobile services through an Optus Mobile Virtual Network Operator (MVNO) agreement, leveraging Optus’ 4G and 5G networks.
Telstra Group ((TLS)), Optus and TPG Telecom ((TPG)) operate as Mobile Network Operators (MNOs), with market shares of around 42%, 28% and 17%, respectively, owning and managing their own extensive telecommunications infrastructure.
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