BUY Aussie Broadband (ABB)

The Intelligent Investor Gaurav Sodhi

Aussie Broadband’s shares doubled the day they listed. We had expected a rise on listing but the soaring price was a turn off. A business we had expected to list at just over $200 million was suddenly worth $350 million and we decided not to pursue it.

New information, however, challenges that view. ACCC data shows that Aussie’s share of high-end broadband plans is growing quickly. More than 40% of its customers choose ultra-fast plans (defined as more than 100mbs) compared with 12% of the market, and an incredible 86% of new ultra-fast connections to the NBN came from Aussie. This suggests Aussie is collecting the most profitable customers, with a marketing budget that is probably less than Telstra’s executive lunch bill.

We think Aussie is on track to generate about $860 million in revenue and, assuming 5% EBIT margins, perhaps over $40 million of EBIT. It isn’t profitable today but that will change. Aussie fought over 100 competitors and industry giants, built an industry-leading software platform and is collecting an outrageous share of high-end broadband users because its management and culture are superior. This advantage is intangible and hence hard to replicate. It’s also hard for investors to adequately price.

To some, this might look like a $350 million business that makes no money in a competitive industry. In our view, this is a fine example of a business with a deep cultural moat. Those are the hardest to breach.BUY.