Subscription-Based ICT Services Will Strengthen Future Earnings Stability

Key Takeaways

• Integrating SI and Telecom businesses enhances service offerings, while ICT strategy boosts revenue growth and margins.
  
• Subscription-based IT services boost recurring revenue, improving long-term earnings and stability.
  
• High debt levels, economic challenges, and execution risks in integration could affect HKBN's financial flexibility, profitability, and future revenue generation.

Catalysts

An investment holding company, provides fixed telecommunications network, international telecommunications, and mobile services to residential and enterprise customers in Hong Kong, Mainland China, and Macao.

• HKBN's integration of their SI and Telecom business is starting to yield results, allowing them to offer better services and products, which should drive increased revenue and higher margins, particularly through their ICT strategy. This could enhance both revenue growth and net margins.
  
• The introduction of IT as a service and Device as a service on a subscription basis is expected to capitalize on the existing demand for IT resources, boosting recurring revenue streams for SMEs and enterprises, which will likely improve HKBN's long-term earnings and revenue stability.
  
• The expansion of high-speed broadband services with their newly launched 25 GigaFast broadband gives HKBN a competitive edge over rivals for the next 12-15 months, likely increasing market share and driving higher ARPU, positively impacting revenue and earnings growth.
  
• HKBN's strategic defocusing away from non-value-adding reselling channels toward more profitable direct channels, along with leveraging digital platforms, is expected to improve net margins and strengthen the quality of earnings.
  
• Ongoing deleveraging efforts, supported by strong cash conversion from operational activities, aim to reduce financing costs and improve net earnings and financial flexibility, positioning HKBN for sustainable growth.

HKBN Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HKBN's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 4.7% in 3 years time.
• Analysts expect earnings to reach HK$538.3 million (and earnings per share of HK$0.36) by about April 2028, up from HK$10.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 692.4x today. This future PE is greater than the current PE for the HK Telecom industry at 15.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

HKBN Future Earnings Per Share Growth

Risks

• The company's revenue showed a slight decrease of 1% year-over-year, and residential revenue dropped by 2%, reflecting challenges in driving top-line growth. This could impact overall financial health and market perception of growth potential.
  
• Despite improvements in EBITDA, the net leverage ratio remains high at 4.93x, indicating significant levels of debt that may impact future earnings and financial flexibility.
  
• The company relies heavily on integrating ICT and Telecom services, which presents execution risks especially in maintaining the pace of this integration, potentially affecting revenue and net margins if not managed efficiently.
  
• The residential services, although described as a cash cow, have shown a decline in revenue due to strategic defocusing on reseller contributions without clear immediate compensatory gains from other channels, which can weigh on future revenue generation.
  
• The current high interest rate environment poses continuous economic challenges and could increase borrowing costs, negatively impacting net margins and the profitability of future operations.

Valuation

• The analysts have a consensus price target of HK$5.05 for HKBN based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$11.5 billion, earnings will come to HK$538.3 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of HK$5.1, the analyst price target of HK$5.05 is 1.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.