Towering Demand-Pull and Technological Changes to Drive Diversified Communication Services Sector Growth

I. Sector Landscape and Outlook

The Australian diversified communication services sector, which essentially incorporates telecommunications and information media, demonstrated its non-cyclical attribute during COVID-19 hardships and stood comparatively resilient. As a result, the sector accounted for 2.4% of total 2020 GVA and registered the highest GVA growth across all industries, of 5.1% CAGR (1990 – 2020). In FY20, amidst COVID-19 turmoil, the communication sector witnessed a decline of 7.1% and 1.3% in employment and sector value-added, respectively, on a YoY basis. However, sector EBITDA inclined remarkably by 15.9% and stood at ~$19.2 billion in FY20, while sector sales declined marginally by 0.5%.

Figure 1: Improved Profitability and Stable Industry Value Warrants Sustainability in the Sector:

Source: Australian Bureau of Statistics, Analysis by Kalkine Group

Telecommunication infrastructure has been consistently growing over the years. In March 2021, over 8.28 million broadband services in wholesale residential space were rendered by National Broadband Network (NBN). FTTN is one of the most popular network access technology, accounting for ~3.07 million services, up by 6.7% on a PcP basis. FTTC services registered a strong growth of 86.1% of all the technologies and stood at ~1 million services in March 2021. During the same period, HFC and FTTB increased by 21.6% and 34.1%, respectively.

Satellite NAN services got cannibalized with alternate technologies and declined by 3.2%. The proportion of businesses and homes on 50Mbps wholesale speed plans increased to 71% in April 2021 from 68% in April 2020, compensating for a decrease in 25Mbps wholesale speed plans to 29% in April 2021 from 32% in April 2020. The launch of the Mobile Blackspot Program aims to fund new network stations to address connectivity issues across regional and remote areas, with more than 925 base stations activated.

In June 2020, Telstra introduced its 5G network, which encompassed a third of the Australian population in 53 cities. In February 2020, Optus introduced 2300 MHz and 3500 MHz spectrum, the world's first dual-band production network, while partnering with Samsung and Ericsson. In the first half of 2020, the partnership of Vodafone and Nokia rolled out 5G network and launched its first live 5G sites. In addition, the Australian government announced a $20 million Australian 5G Innovation Initiative, which aims to promote the value of 5G networks.

Figure 2: Active NBN Residential Mass Market Broadband Services by Technology Type:

Source: Australian Competition & Consumer Commission, Analysis by Kalkine Group

Containment actions amid COVID-19 turmoil in 2020 drove an increase in internet activity, specifically for telehealth consultations, work from home guidance and video conferencing. Moreover, email, web browsing, and online video streaming activities increased substantially. In June 2020, Australia downloaded 7 million TB of data on fixed networks and circa 1 million TB on mobile devices. Internet Access at Home Spiked in Metropolitan and Regional Areas to 95% and 94.9% (92.5% in May 2019) in June 2020 (87.1% in May 2019), respectively.

As per the Australian Bureau of Statistics, 68% of businesses placed online orders in FY20 relative to 63% in FY19, while 50% of businesses received online orders relative to 41% in FY19. Subsequently, 55% of businesses paid for cloud computing services relative to 42% in FY18. In addition, 8% of businesses reported internet security breaches in FY20 relative to 11% in FY18.

Figure 3: Internet Access at Home Gained Momentum:

Source: Australian Communication and Media Authority (ACMA), Analysis by Kalkine Group

As per a survey conducted by ACMA, Live free-to-air TV preference declined abruptly from 75.3% in June 2017 to 56% in June 2020, while on the contrary, preference for online subscription services surged from 31.7% in June 2017 to 55.4% in June 2020. FY20 demonstrated a growing demand for online video content in place of linear form. For FY20, total advertisement revenue declined by 6.2% YoY. In FY20, digital media advertisement revenue increased by 5.8% YoY while holding 68% of total advertising revenue relative to 61% in FY19. In FY20, revenue from television media declined by 15.7% YoY and stood at $2,748 million. Consequently, cinema, outdoor, print and radio media segments assumed a decline of 66.5%, 38%, 31.8% and 26.6% YoY in advertising revenue in FY20, respectively.

With the Australian population's evolving viewing and listening habits, the take-up of Broadcasting Video on Demand (BVOD) and Subscription Video on Demand (SVOD) services improved over time and podcast preferences assumed over 420 million downloads in FY20.

Figure 4: Viewing Behaviors in the Past 7 Days (Respondents in %):

Source: Australian Communication and Media Authority (ACMA), Analysis by Kalkine Group

Key Risks & Challenges:

Bushfire and similar catastrophic incidents affect the fixed-line services and mobile coverage which typically result in collisions in network infrastructure and network outage. All segments, except digital media, witnessed sharp revenue declines due to significant alterations in the Australian population's viewing and listening habits, which has displaced advertising revenue to BVOD and SVOD platforms. Network congestions may persist with a spike in usage across both Regional and Metropolitan areas; hence telecom infrastructure may not fall in line with user demands. Affordability and spending have to be managed as it is the key restraining factor for mass digital incorporation. Telecom is a high capex business; hence IoT developments and network investments may delay operating cash flows.

Figure 5: Key Risks and Challenges:

Source: Analysis by Kalkine Group

Outlook:

An estimated 75% of homes with a fixed-line NBN can order gigabit NBN by the next two years. Simultaneously, the 5G spectrum allocation is supported in 850/900 MHz and 26 GHz bands with competitive auctions. In NBN wholesale markets, the total number of services and total CVC capacity acquired stood at 8.3 million (up by 2.1%) and 21.0 Tbps (up by 6.3%), respectively, illustrating a favourable outlook. In FY20, the government announced an investment of $4.5 billion to facilitate wholesale speeds to forecasted 75% of homes and businesses. In addition, government investment of $84.8 million is expected to facilitate the Regional Connectivity Program may support data coverage and NBN fixed-line footprint.

Figure 6: Outlook Framework for The Diversified Communications Services:

Source: Analysis by Kalkine Group

II. Investment theme and stocks under discussion (CAR, CNU, REA, NEC)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/EBITDA’ method

1. ASX: CAR (Carsales.com Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$5.53 billion)

CAR is involved in online advertising business via facilitating an online platform for buying and selling automobiles.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of ­­­­­­22.04% on 24 June 2021. We believe that the stock might trade at some premium compared to its peer median EV/EBITDA (NTM Trading multiple) given investments in growth in lead volumes and traffic, robust market standing in Brazil & Korea and high operating cash flows. For the said purposes, we have taken peers such as Seek Ltd (ASX: SEK), Domain Holdings Australia Ltd (ASX: DHG), Hipages Group Holdings Ltd (ASX: HPG), to name a few. Considering the prudent working capital management, sustainable leverage, high conversion rate, valuation, and trading levels, we give a “Buy” recommendation on the stock at the current market price of $19.520, down by ~0.510% on 24 June 2021. In addition, the stock has delivered an annualised dividend yield of 2.56%.

2. ASX: CNU (Chorus Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.53 billion)

CNU is involved in developing telecommunication infrastructure products which involves a range of wholesale broadband, voice and data services.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of ­­­­­­21.06% on 24 June 2021. We believe that the stock might trade at slight premium compared to its peer average EV/EBITDA (NTM Trading multiple) given increased fibre connections & demand, uptake in UBF and sustainable capital expenditure in fibre infrastructure. For the said purposes, we have taken peers such as Vocus Group Ltd (ASX: VOC), Spirit Technology Solutions Ltd (ASX: ST1), MNF Group Ltd (ASX: MNF), to name a few. Considering the cost saving measures, increased guidance for capex, high EBITDA expectations, valuation, and trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.760, up by ~1.587% on 24 June 2021. In addition, the stock has delivered an annualised dividend yield of 3.93%.

3. ASX: REA (REA Group Limited)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$22.25 billion)

REA is engaged in advertising property and property-related services on mobile applications and online websites with operations in Australia, Europe and Asia.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of ­­­­­­9.98% on 24 June 2021. We believe that the stock might trade at some discount compared to its peer average EV/EBITDA (NTM Trading multiple) given expected decline in new project commencement, scope of improvement in working capital management and anticipated listing pressures. For the said purposes, we have taken peers such as Rent.com.au Ltd (ASX: RNT), Seek Ltd (ASX: SEK), Domain Holdings Australia Ltd (ASX: DHG), to name a few. Considering the expected fall in operating expenses, high buyer enquiry levels, increase in app downloads and app launches, valuation, and trading levels, we give a “Hold” recommendation on the stock at the current market price of $166.820, down by ~0.968% on 24 June 2021. In addition, the stock has delivered an annualised dividend yield of 0.68%.

4. ASX: NEC (Nine Entertainment Co. Holdings Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$5.11 billion)

NEC is engaged in broadcasting business and provides news, lifestyle, entertainment and sports related content.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of ­­­­­­12.41% on 24 June 2021. We believe that the stock might trade at slight premium compared to its peer average EV/EBITDA (NTM Trading multiple) given the diversified business in broadcasting and competitive fundamentals. For the said purposes, we have taken peers such as HT&E Ltd (ASX: EM1), Pureprofile Ltd (ASX: PPL), IVE Group Ltd (ASX: IGL), to name a few. Considering the diversified broadcasting business, 9NOW market dominance, growth in digital and subscription base, consistently improving fundamentals, valuation, and trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.980, down by ~0.667% on 24 June 2021. In addition, the stock has delivered an annualised dividend yield of 2.34%.

Note: All the recommendations and the calculations are based on the closing price of 24 June 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.