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Bredband2: Margin pressure from high marketing activities - ABG

Good customer intake but weaker-than-expected margins

We cut ‘22e-’24e EBITDA by 8-5%

13-11x ‘22e-‘23e EV/EBITA, 6-9% lease adj. FCF yields

+3,000 customers q-o-q (vs. ABGSCe +2,500)
Bredband2’s Q2 was slightly on the soft side, with weaker margins than expected. Sales of SEK 383m were -2% vs. ABGSCe and grew 1% y-o-y, mainly driven by the acquisition of TH1NG as we believe that price increases have been low, as suggested by our price tracker. Although we note that several of its competitors are currently raising prices, Bredband2 is currently prioritising customer growth, which was impressive in Q2, up 3,000 q-o-q (vs. ABGSCe 2,500 and up from an organic intake of 500 in Q1). However, emphasizing customer growth entails margin pressure due to customer discounts, which meant that the gross margin declined to 35.0%, from 35.7% in Q1. We estimate continued gross margin pressure in Q3, after which we expect margins to improve on the back of price increases. Although opex was largely in line with our forecast, EBITDA of SEK 59m for a margin of 15.5% came in 7% below ABGSCe due to the weaker sales and lower gross margins.

We expect more margin pressure in Q3
We trim our ’22e-‘24e sales estimates by 2-1% on slightly lower ARPU assumptions. Meanwhile, we cut ‘22e-‘24e EBITDA by 8-5% following the Q2 miss coupled with lower gross margin assumptions. As we also raise our D&A estimates, our corresponding EBIT forecasts are down by 24-13%. Although we have reduced our Q3e expectations, we continue to see improved organic growth rates in Q4e (and 2023e) amid price hikes and the company’s plan to gradually upsell new services.

Strong balance sheet bodes well for more M&A activity
On our new estimates, Bredband2’s share is trading at 13x-11x ’22e-‘23e EV/EBITA, coupled with lease adj. FCF yields of 6-9%. The lease adj. NIBD was SEK 10m in Q1, which in turn offers the company solid headroom to pursue further M&A opportunities. Given the successful integration with A3, we think that the ...
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