Q1 2023 net sales amounted to cSEK383m (SEK383m), largely flat y/y growth and broadly aligned with our expectations of cSEK385m, deviating just 1%. As expected, the net customer intake of broadband customers via fibre continued to be in negative territory and amounted to negative 2,500 q/q, which we believe partly can be explained by Bredband2’s recent price hikes. However, the gross margin was 33.9% (35.7%), somewhat below our expectations of 34.8%, a slight decrease y/y (35.7%) and sequentially from 34.4% in Q4 2022. 

Despite the slightly softer sales and gross margin compared to our expectations, OPEX improvements offset this, leaving the EBITDA largely in line with our expectations, while the EBIT came in 5% above our expectations. Consequently, the EBITDA margin amounted to 15.8% (16.4%) versus our estimated 15.6%, while the EBIT margin came in at 6.5% (7.1%) compared to the expected 6.2%.

According to management, the quarter’s focus has been on margins, which is expected to continue, heading to improve the EBIT margin by c1pp to Q4 2023. However, as management has communicated, this should continue to arrive at the expense of temporarily lower customer intake. Moreover, Bredband2 expects increased sales in the coming quarters while seeing good growth opportunities for both the private and corporate sides. The centralisation of its corporate segment has recently seen a positive effect, while Bredband2 expects to hire additional salespeople within this segment. In the long term,  management states a focus will be on increasing the intake of fibre customers and increasing the sale of additional services to drive ARPC improvements.

Total broadband customers via fibre amounted to approximately 456,000 (456,000) as of the end of Q1 2023. We argue that the slightly negative q/q net customer intake of 2,500 stems from several factors. First, we believe Bredband2’s price increases implemented in Q4 2022 should have given rise to an increased churn. In addition, as Bredband2 expect continued price adjustments from here and onwards, the figure could also have been affected by future price hikes, as this gives rise to instant churn when customers are notified in advance. Moreover, we argue that the increased focus on margins may have implied less marketing and fewer/less aggressive price-based campaigns to acquire new customers, to cover this customer churn. However, management has been clear and transparent about the temporarily softer customer intake, given the recently increased margin prioritisation, which is expected to continue ahead.

The ARPC grew slightly y/y while decreasing somewhat q/q. Notably, as Bredband2 discloses its total number of broadband customers via fibre, it includes both private and corporate customers. Nevertheless, we have chosen to use ARPC based on private sales and the total number of customers despite including a share of corporate customers. Although this is not an entirely true definition, we use it here as a benchmark, as Bredband2 does not disclose its private customer base separately. Moreover, its private customers are its most substantial customer segment (c76% of its total sales in Q1 2023), while we believe its corporate customers account for a minor share of its total customers.

Despite the negative net customer intake in the quarter, the gross margin of 33.9% decreased y/y (35.7%) and sequentially from 34.4% in Q4 2022. According to management, this stems mainly from the network owners’ price hikes implemented in February 2023, while Bredband2 is expecting gradual price adjustments from here and onwards, in addition to those made in Q4 2022. However, Bredband2 offset this with clear OPEX improvements in the quarter. Nevertheless, we believe a future challenge is, owing to its focus on margins, to increase and maintain solid margins while at the same time returning to positive net customer intake to drive organic growth along with ARPC improvements. Notably, Q4 2020 and Q1 2022 figures in the graph below include acquired customers from A3 and TH1NG, which saw more significant increases than the y-axis spans.

However, we believe much is happening on the market in the current macroeconomic situation, with price increases from both competitors and network owners to parry the current inflation. As such, we believe that a low-price supplier like Bredband2 could possibly benefit from this, as it could imply that consumers will be more price-sensitive than before, especially regarding a generic offering like fibre broadband. In addition, we argue that as competitors hike prices to keep up with those from network owners, it creates room for Bredband2 to raise its prices and yet remain one of the cheapest in the market or retain price levels to attract further customers and thus take market share.

According to management, we will see additional price hikes from network owners in Q3 2023. However, as mentioned, Bredband2 will parry these with gradual price hikes from here and onwards. Worth mentioning is that Bredband2 has, through its niched fibre focus with no roots in older technologies and its scalable business, parried such increases historically through internal efficiency. We state this continued in Q1 2023, as the total OPEX was lower than our expectations. According to management, this stemmed mainly from Bredband2 having reviewed its consulting-based usage and internal infrastructure originating from the A3 acquisition with expired contracts, which we believe will continue to materialise in the next few quarters. 

Bredband2’s low CAPEX needs (less than 2% of its sales in 2022) combined with its negative NWC imply strong cash conversion. Moreover, given a current net cash position, we believe the company has clear headroom for future M&A opportunities. According to management, the company is continuously looking for various potential M&A targets in the long term and across all relevant business segments, which makes us believe in such activities in the future.

Another opportunity, in our view, with Bredband2’s strong cash flow, solid balance sheet, and valuation currently lower than historical levels, makes it a potential takeover candidate. We see this as an opportunity for a more significant player to access strong cash flows at an attractive price. Moreover, according to PTS, the top five private fibre broadband players accounted for c86% of the market in H1 2022 (the most recent figure), while the sixth-largest market participant held just a 2% market share. We thus see Bredband2’s significant market share of c13%, further highlighting it as an attractive potential target for a more prominent player to get access to a substantial market share. Moreover, we believe the relatively mature market makes it harder to organically reach new customers, leaving ARPC as the primary future growth driver. As such, continued consolidation could allow larger players to drive further growth in an industry where scale matters. On the other hand, we are aware that Bredband2 has been a takeover candidate for a long time, while another question is whether the owners are ready to sell.

Following Bredband2’s Q1 2023 report, we make minor 2023e and 2024e forecast adjustments. First, we lower our sales assumptions marginally for the period, implying a 1.1% (1.5%) and 2.3% (2.3%) y/y growth, respectively. This stems from our continued expectation of a somewhat softer customer intake in the short term, backed by management’s indications. At the same time, we believe Bredband2 will offset this somewhat through further price hikes. Moreover, Bredband2 has, in combination with its margin prioritisation, also stated an increased organic growth focus in H2 2023, leading us to expect slightly stronger growth in the latter part of the year.

In addition, we decrease our 2023e–2024e gross margin assumptions slightly while we decrease our OPEX forecast by 5-6% for the same period on account of continued cost improvement seen in Q1 2023, which we expect to continue ahead. 

Altogether, this gives rise to a 4% increased EBITDA and EBIT forecast for the period, implying a slight margin expansion in 2023e and 2024e compared to 2022. We argue that management’s margin prioritisation and continued internal efficiency improvements support this. For further estimates, see the tables below.

Despite the minor forecast changes, our DCF leaves our fair value range intact, with a Base Case of SEK1.9 per share and Bear and Bull Cases of SEK1.0 and SEK2.5, respectively. With a share that has performed approximately -10% YTD, Bredband2 is currently trading at historically low multiples, with an EV/EBIT of 10x based on our 2023e and an EV/EBITA of 9x.