Earnings Alert: 1HFY8/22 AFF beat expectations while maintaining a full-year AFF forecast
- 1HFY8/22 results beat; AFF grew by 94% y-o-y
- Adjusted service EBITDA grew 4% y-o-y, with margin expanding 3.7ppts
- Maintain AFF growth forecast of c.5% for FY8/22
- Maintain BUY with a TP of HK$13.6 for its attractive dividend yield of c.9%
1HFY8/22 results highlights
Total revenue increased by 9.2% y-o-y to HK$6,803m, mainly driven by strong sales of smartphone products. Service revenue decreased by 8.5% y-o-y to HK$3,515m, mainly due to a decrease in low margin wholesale IDD as well as an impact from the disposal of HKBN JOS Singapore and Malaysia.
Enterprise customers increased by 1k y-o-y to 106k. Enterprise ARPU declined by 4% y-o-y to HK$2,905. Residential broadband subscribers grew by 3k y-o-y to 889k. Residential ARPU decreased by 2% y-o-y to HK$187, excluding the one-month service fee waiver to customers in FY8/21.
Adjusted service EBITDA increased 4% y-o-y to HK$1,119m y-o-y, and service EBITDA margin expanded 3.7ppts to 31.8%, due to a decrease in low-margin wholesale IDD services.
Adjusted free cash flow (AFF) rose 94% y-o-y to HK$758m, higher than market expectations, due to decrease in capital expenditure, interest and premium paid on the senior notes redemption. The company declared an interim dividend of HK$0.40 per share, representing a 3% y-o-y growth. The company paid out 78% of AFF (including distribution to Vendor Loan Notes) in 1HFY8/22 (vs. 148% in 1HFY8/21).
Outlook
In the enterprise market, we expect HKBN to cut prices in order to gain market share. Upselling of system integration services could partly offset telecom service ARPU pressure, given system integration customers on average consume 10 times more compared to the standalone telecom service. HKBN has already partnered with many multi-nationals such as Cisco, Microsoft, and AWS.
HKBN has secured c.140k customers with Disney+ bundles since the launch in Nov 2021, while the management postponed the 1m broadband subscribers target by six to nine months. Besides, HKBN partners with 3HK as an MVNO to resell its 5G services for the 1m residential households. This could be another growth driver for HKBN’s residential business.
We expect the AFF to normalise in 2HFY8/22, given that the strong AFF growth in 1HFY8/22 was largely due to a c.200m decrease in interest and premium paid on senior notes redemption after repurchasing all remaining portion of the senior notes. We forecast AFF to grow by 5%, 9%, and 15% for FY8/22, FY8/23, and FY8/24, respectively. Overall, we remain positive in the company’s medium term outlook, and are confident that HKBN is able to achieve the target of an accumulative AFF of HK$2.70 per share for FY8/22-FY8/24 as set in its Co-Ownership Plan IV. Maintain BUY for its attractive dividend yield of c.9% with a decent dividend CAGR of c.10% in FY8/21-FY8/24, with a TP of HK$13.6.