Sales 0% vs. ABGSCe, EBIT +16% vs. ABGSCe

We expect BRE2 to raise its prices in H2

15x ‘20e EV/EBIT, 14% ’19-‘22e EBIT CAGR

Gross margins showed encouraging sequential improvement
Bredband2 once again delivered EBIT that exceeded our forecast, with Q2 EBIT of SEK 15.6m (+16% vs. ABGSCe), representing y-o-y growth of 50%. The strong EBIT growth was driven by solid sales growth (+8% y-o-y) together with stabilising gross margins (+12bps q-o-q) and good cost control. As such, the incremental EBIT margin was 36%. The only real weakness shown in the report was the sequential customer intake of 1,100, which was below our forecast of 3,600. We believe that an explanation for this is that the firm has recently raised its prices, as suggested by our price indicators.

Sales forecasts intact, but we raise ‘20e-‘22e EBIT by 5-3%
We keep our sales forecasts largely intact but raise 2020e-‘22e EBIT by 5-3% on the back of higher gross margin assumptions, as well as lower opex estimates. We think that the COVID-19 pandemic has increased the demand for broadband services and we therefore see good prospects for Bredband2 to conduct further price hikes in H2’20. This should give tailwinds to gross margins and also result in improved ARPU metrics. Adversely, increasing prices will likely have an impact on customer intake. As such, we see a customer intake of 2,900 in H2e, down vs. 6,100 in H1.

Well-positioned to pursue growth opportunities
We think that Bredband2 is poised for continued growth in the coming years. While the market growth in terms of fibre deployment is currently decelerating due to saturation, we believe that Bredband2 will find improved sales from raising its prices and adding new services. We see a ’19-‘22e sales CAGR of 7%. Meanwhile, we estimate its cash conversion will average 122% in ‘20e-‘22e, amid its asset-light business model and favourable payment terms to its customers and suppliers. At the current share price, Bredband2 is trading at 15x ‘20e EV/EBIT coupled with
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ABG Sundal Collier - Introduce.se