The battle for the hearts and connections of household and SME internet customers is intensifying – and so far the smaller ‘challengers’ are winners at the expense of the big three incumbents.
A further opportunity lies in snaring market share from the National Broadband Network (NBN), with the wholesale provider enabling free ‘fibre to the premises’ (FTTP) upgrades for costlier, higher-speed plans.
FTTP is far more reliable than fibre to the node or fibre to the curb, which rely on often flood-prone pits and legacy copper wiring to connect to households.
The two key challengers, Aussie Broadband (ASX:ABB) and Superloop (ASX:SLC) have been winning broadband market share from incumbents Telstra (ASX:TLS), TPG Telecom (ASX:TPM) and the Singapore-owned Optus.
In the two years to March this year, Aussie has grown NBN market share from 6.2 per cent to 8.6 per cent and Superloop’s share has increased from 1.8 per cent to 3.8 per cent (including inorganic growth).
The overall ‘challenger’ market share has grown from 10.8 per cent to 17.5 per cent in this period and Superloop believes it could get to 30 per cent (based on overseas trends).
According to broker Wilsons, the challengers are growing at above-market rates by winning customers organically, acquiring other telcos (or their customer base) and converting wholesale services from another provider on to their own networks.
Wilsons believes the FTTP upgrade program will be a “material opportunity” for further gains. With Aussie and Superloop 36 per cent and 47 per cent of their plans respectively are the upgrade-eligible 100 megabits per second or more, compared with only 22 per cent for the overall NBN market.
Over the past 12 months, Telstra and TPG shares have declined 16 per cent and 10 per cent respectively.
In contrast Superloop shares have climbed 150 per cent, ascribing a $740 million market cap. Aussie shares have gained 16 per cent and the company is now worth $1.03 billion.
But not everything is going Aussie’s way: in March it “unexpectedly’ lost a deal to service Origin Energy’s 133,000 telco customers. That honour went to Superloop under a six-year deal.
Buoyed by the Origin win, this week Superloop cheerily upgraded its 2023-24 earnings guidance to the top end – or exceeding – its previously enunciated $49-53 million, a circa 40 per cent improvement.
Aussie points to earnings of $116-121 million, 29 per cent higher at the midpoint.
In February, Aussie lobbed a rejected conditional offer to buy Superloop – a good move given Superloop shares change hands at around $1.50 compared with the current 73 cent implied value of Aussie’s scrip offer (97 cents at the time).
Aussie remains armed with an 11.99 per cent Superloop stake, having been forced to partly sell down the 19.9 per cent acquired ahead of its tilt.
Given the rash of takeovers in telco small cap land, it’s a case of ‘never say never’.
In 2022, Uniti Group was acquired by NZ interests for $3.6 billion, while Aussie subsumed voice over internet protocol (VoIP) specialists Over the Wire and then Symbio (Superloop was also a bidder).
Vocus was bought by Macquarie Infrastructure Partners and last month the unlisted Maxo Communications acquired VoIP minnow Vonex (ASX:VN8) at a 94 per cent premium. Earlier, Maxo also bought assets from Aussie.
Meanwhile, overlooked TPG spin-off Tuas (ASX:TUA) has been making inroads into the Singaporean broadband market with its sharply priced residential and commercial offerings.
While the marked-down titan of telephony Telstra still has its charms, it pays for investors to cast their net wider.
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