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Morningstar | Vocus Resets Focus

After a torrid year of challenges and guidance downgrades, Vocus ended fiscal 2018 with flat adjusted EBITDA of AUD 366 million, while suffering a 17% fall in normalised net profit after tax to AUD 127 million. These were largely in line with our expectations, albeit at the lower end of management projections back in February.

Critically, the result was not generated under the watch of the recently-appointed CEO Kevin Russell who has promptly reset the fiscal 2019 EBITDA base at AUD 350 to 370 million. While this dreaded "year of reinvestment" initiative has led to an average 5% cut to our medium-term earnings estimates, our outer forecasts are largely unchanged. As such, our AUD 2.90 per share fair value estimate for narrow-moat-rated Vocus is intact.

The new CEO's view that Vocus' single-digit market shares in various telecom market segments are low is hardly a revelation, especially relative to its enviable infrastructure footprint. The issue to-date has been execution, something that Kevin Russell is fully cognisant of. We are encouraged by his plans to aggressively chase revenue opportunities, and maintain our 6% five-year earnings CAGR forecast for the group, with EBITDA approaching the AUD 500 million mark in five years' time.

We are equally encouraged by Vocus' improving cash flow performance (88% EBITDA/cash conversion in fiscal 2018, up from 52%), providing breathing space to its leverage covenant limit of 3.75 times versus the 2.73 times the group ended fiscal 2018 with.

The gap between Vocus' stock price and our AUD 2.90 intrinsic assessment has now closed to just 5%. Optimism regarding the new CEO's turnaround plans may have partly driven today's 7% stock price rally. However, sentiment may have also been aided by potential consolidation activities in the telecom space, with merger talks between TPG Telecom and Vodafone Hutchison fuelling speculation that Vocus may also become involved.