While
-Views on
-High margin telco division has client concentration risk
-Comdain is the stand-out performer
-Brokers acknowledge upside potential exists from
After warnings by
Fuelling Bell Potter's concerns are ongoing issues surrounding the margin outlook for FY22 and beyond, when scale in the telecommunications business is set to decline further.
From a margin perspective, the transition to new contracting arrangements is also viewed by
Management at the services provider has made it clear covid-related disruptions to work programs and shortages across client supplied materials, plus the likelihood of further restrictions on movement and interstate travel bans, will continue to hamper the company for the reminder for the year.
After an arduous six months,
But while covid certainly didn't help, it was the end of the NBN construction program last year, on top of lower activation volumes, that saw the company post a -30% decline in Telecommunications revenue to
But while the broker has greater confidence there should be no further downgrades in the current cycle for
Client Concentration risk
Thus, the loss of a large contract or material reduction in demand from either
Given what is still expected to be a material FY22 earnings decline, the broker does not see a reason to upgrade from its Hold recommendation at current levels.
Post the February interim report release,
In addition, the broker has made more aggressive cuts to its forecast earnings (EBITDA) margins, which it expects to be impacted materially by the anticipated loss of scale in the telecommunications business in FY22.
Earnings rebase is in motion
Given that the major drop-off in the telco segment was largely expected, especially given the run-off in historical contracts and timing of workflows around major contract transitions,
Given the productivity disruptions experienced in most states were far from unexpected,
With first half earnings of
Re-based to reflect the covid and contract disrupted year, group guidance of a similar first/second half earnings skew equates to a -11% revision to
Underpinning the broker's improving sentiment towards
What also can't be overlooked, adds
With the net cash position providing balance sheet headroom,
Swing factor
Broadly in line with its expectations, there was little within
However, given lacklustre results in other areas of telecommunications expected to persist into FY22, it agrees with other brokers that the ability to secure additional work from
Despite the benefits of diversification evident within Comdain's performance, which is on track to deliver around 15% revenue growth in FY21 (second half growth of around 25% versus the previous corresponding period), Macquarie notes that utilities, particularly Comdain, is a lower margin business relative to the Telecommunications segment.
The broker has dropped its FY21-23 earnings forecasts by around -30%. While Macquarie assumes
On the back of ongoing weakness in Wireless and Utilities, Macquarie has downgraded second half forecasts to be approximately in line with the first. Underscoring Macquarie's downgrade were
Equally concerning to Macquarie is activation and assurance revenue, with the outlook for activations expected to remain weak, following a revenue decline after peaking in FY20.
On a more positive note, Macquarie recognises the pipeline of new gas and water utility project opportunities is robust and growing on the back of expanding urban development and upgrade/replacement of aging infrastructure.
Equally encouraging, the broker also notes
FNArena's consensus forecasts, in this case based on projections by
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