Bredband2 - Beat on margins, synergies ahead
Sales in line with our forecast, but EBITDA well above We raise our ’21e-’23e EBITDA by 12-11% 9% FCF yield and 13x EV/EBITA on 2021e Better margins than expected While sales of SEK 377m were 2% below our forecast, gross profit was SEK 129m (+12% vs. ABGSCe) for a margin of 34. 2%, up 1. 7ppt vs.
Q1’20. Although we are under the impression that this was partly driven by some reclassified items (now specified in opex), we estimate that the underlying gross margin was strong, driven by price hikes as well as Bredband2’s decision to discontinue some margin-dilutive revenue streams (e. g.
parts of A3’s consultancy business). With the higher-than-expected gross profit, Bredband2 beat our adj. EBITDA and EBIT estimates by 13% and 2%, respectively.
That said, customer intake was hurt by the price hikes as well as by the company’s decision to adjust the way it recognises customers. Expect increased churn in Q2-Q3 We expect even weaker customer intake in Q2-Q3, as the company has started to consolidate A3’s customers under Bredband2’s brand. While low customer intake usually raises concerns, we believe this should prove a short-term issue, and that the company will stand on firmer ground for growth after this.
The timing of this should also coincide with the arrival of cost synergies from the merger, resulting in a more effective organisation. We reduce our ’21-‘23e sales estimates by 3-4% due to lowered customer intake assumptions. However, our ’21e-’23e EBITDA estimates are raised by 12-11% on the back of lower costs, as we have better confidence in synergies ahead.
In terms of EBIT, our ’21e-’22e EBIT is down 10% and 2%, respectively, due to higher D&A assumptions. We argue that size matters We continue to like Bredband2’s position on a market that is undergoing consolidation. Being Sweden’s third-largest fibre broadband operator should favour the company, both in terms of operational efficiency and pricing power.
On our new estimates, its share is trading at 13x.
