Vocus Communications

Friday 8th March 2019

Fibre network services provider, Vocus reported results recently which were well received by investors with the shares jumping over 10% on the day, as the company’s revenues held fairly well, and profitability was in line with expectation; amidst management’s 3-year turnaround programme. The shares have been re-rated strongly over the past year, but under the leadership of turnaround specialist, Kevin Russell and with a clear growth path we have a positive view on the investment case at current levels.

Starting from the top and revenues for the group came in circa 1% higher year-on-year to $974.2 million, with Vocus Networks-Services (VNS) reporting substantial year-on-year growth on the back of a major contract win with the Australian government. There was also a modest contribution from the New Zealand business. Despite the positives, there was continued weakness in the consumer and business units from cannibalisation, due to the ongoing National Broadband Network (NBN) rollout.

As a result of this development, management emphasised their plan to ‘go around’ the unprofitable NBN offering. We are pleased with management’s business sense as evidenced by Mr Russell’s desire to focus the company towards fibre infrastructure – its core competency – as well as offering a higher value mobile broadband offering to grab a more profitable slice of the market.

Moving on, we have a closer look at the divisional level, starting with the VNS business. As noted above, the division won a lucrative contract with the Australian government in January to scope out the design construction and procurement for the Australia-Papua New Guinea-Solomon Islands subsea cable. This resulted in a sizeable $60 million contribution to revenue growth.

There was also organic growth in enterprise sales as well as NBN sales, resulting in revenues for the segment growing 27% to $360.9 million while EBITDA registered a more modest 3% year-on-year growth to $166.9 million. This smaller increase was largely due to the government contract and NBN growth contributing lower margins.

Going forward, management has reiterated their outlook for the FY19, and expects underlying EBITDA (including LTI costs) should fall in the range of $350 and $370 million by this August. Though this expectation is conservative relative to the FY18 result of $366 million. Note that this factors in the ongoing 3-year turnaround programme, which will carry its share of restructuring costs; thus, an expectation of this level is a positive sign for the company.

All in all, we are pleased with the progress and momentum of the turnaround (as per results), especially with Mr Russell only 6 months in to a 3-year makeover. ‘Rome wasn’t built in a day,’ and we believe management have laid out a realistic roadmap to restore shareholder value. Vocus plans to double revenue from the core Australian and New Zealand infrastructure businesses over the next five years.

Disclosure: Interests associated with Fat Prophets declare a holding in Vocus.

Greg Smith is the Head of Research at investment research and funds management house Fat Prophets.

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