Company overview - Vocus Group Limited, formerly Vocus Communications Limited, is engaged in providing telecommunications and other services. The Company's segments include Australia and New Zealand. It is engaged in the supply of broadband, fixed voice, mobile, data center, cloud and energy services to consumer and business segments through the Commander, Dodo and iPrimus brands in Australia, and Slingshot, CallPlus and Orcon in New Zealand. The Company offers data network solutions, including Dark Fiber, which is a fiber-optic point-to-point connection; Ethernet services; Ethernet Multipoint, which simplifies layer 2 connectivity across multiple offices or data centers, and Internet Protocol Wide Area Network (IP WAN), which converges information and communications technology (ICT) services, such as Internet or Cloud Connect. The Company offers unified communication services, and also the cloud services, including cloud computer, backup and archive, and disaster recovery services.

VOC Details
Progress on Merger & Acquisition efforts of FY 16: Vocus Group Ltd (ASX:VOC) is undergoing transformation from the past two years. VOC has been completing the integration of the Amcom business with the synergies target of $13-15 million, which are expected to be achieved by the end of FY17. Moreover, VOC and M2 Group Ltd obtained the final court approval to proceed with the merger of the two companies. This move was to create Australia’s fourth largest telco by market capitalization operating under the Vocus brand. Further, the merger is expected to have a new force in the telecommunications industry, capable of delivering great outcomes. The merger with the M2 business and the $40 million synergy target has been on track to be completed by the end of FY18. Moreover, VOC had acquired Nextgen Networks. 

Acquisition Synergies (Source: Company Reports)
 
Agreement with Alcatel Submarine Networks: VOC had executed the binding agreement (contract-in-force) with Alcatel Submarine Networks to construct the Australia Singapore Cable (ASC). The ASC project was expected to cost over US$170m over the build period, which would take over 19 months to build. This project completion is targeted by August 2018. Moreover, the ASC projected in FY 17 would be funded from the existing debt capacity, and in FY18 and beyond, the project would be funded from a combination of existing debt capacity, operating cash flow and expected customer pre-payments for Indefeasible Rights of Use (IRU) agreements. VOC is expecting to receive IRU pre-payments of over $US100m during the build period. The ASC project’s effective life is estimated to be a minimum of twenty-five years. Additionally, after the completion of the Nextgen Networks acquisition, VOC had confirmed that it has secured Singapore IDA approval and renewed Landing Rights with MoCIT in Indonesia, which fulfils all the necessary requirements to start and finish the project in combination with moving to a contract-in-force with ASN. VOC has a unique competitive advantage in combination with the Nextgen network, which offers a platform to enhance the utilization of both assets. On the other hand, ASC has made the binding Landing Co-operation Agreement with XL Axiata Tbk to offer security of tenure, commercial arrangements and nation-wide coverage in Indonesia through XL’s 21,000km domestic transmission network. VOC would further give the update on the progress of the ASC project. The key thing is that company’s balance sheet is expected to accommodate the project cost.
 

ASC Project (Source: Company Reports)
 
Other acquisition and divestment highlights: Spark New Zealand reported to acquire the remaining 50% of the Connect 8 fibre construction business from its joint venture partner VOC. On the other side, postthe acquisition in October 2016, VOC has been in the process of integrating the Nextgen business. VOC planned to expand its connection points to the NBN from 68 to 112 of a possible 121 nationwide NBN points of interconnect (POIs). The acquisition provided the greater control over its cost base as well as strengthen the VOC’s competitive product offering for corporate, government and wholesale customers. Moreover, the acquisition included the two infrastructure projects North West Cable System (NWCS) and Australian Singapore cable (ASC) project, which will open-up further strategic opportunities.
 
Change in the leadership: VOC had announced the resignations of James Spenceley and Tony Grist as two of its board members late last year. The resignations were noted to be after a difference of opinion between the Departing Directors and the Board on an alternative leadership framework whereby the CEO would change in early 2017. The board member search has been underway and expected to be appointed in 2H FY17. VOC has appointed Non- Executive Director Michael Simmons to the full-time role of Executive Director Corporate & Wholesale Australia on an interim basis after the recent departure of former Division Director Matt Hollis. Moreover, VOC appointed Mark Wratten as Chief Financial Officer (CFO) of the company.
 
Vocus expectations and initiatives for FY 17: VOC expects the revenue to be about $1.9 billion for their fiscal year of 2017, while the underlying EBITDA is forecasted to be in the range $430m to $450m. The group expects their depreciation & amortization to be over $98 million in FY 17 while NPAT is expected to be in a range of $205m- $215m, but this is low to mid underlying EPS growth. Moreover, there was delay for the completion of Nextgen and there is underperformance of the business relative to the expectations. Additionally, the impact of high margin fibre build contract in the Corporate & Wholesale business is not being rolled forward (for which $10m was EBITDA contribution in 1HFY16 and about $4m EBITDA contribution in 2H FY16).  On the other hand, the group intends to enhance the dividends in line with the growth of the business, after taking into account the capital requirements and accretive opportunities in M&A and further infrastructure projects. VOC reported that net debt to the underlying EBITDA is expected to be over 2x by the end of FY17. Moreover, Vocus expects to report a material below the line expense of $105 million in FY 17. VOC is continually reviewing the business portfolio and accordingly pursuing the sale of their non-core assets or businesses. Vocus is making further investments in the sales, marketing and marketing capabilities to leverage the portfolio of brands. VOC has planned to make investments in data analytics capability to take the advantage of the shift from copper to fibre occurring over next few years in both Australia and New Zealand in order to grow the market share, to reduce the customer churn and to product portfolio. However, the FY 17 result would depend upon the performance of the second half of the FY 17 as the additional investment in consumer sales as well as marketing would impact their first half of FY 17. The capex in FY 17 is expected to be approximately $186m, including the $32m of IRU payments. 

Capex forecasts (Source: Company Reports)
 
Stock Performance: Vocus Group Ltd witnessed a 455% growth in the revenue to $830.8m in FY 16, and 318% growth in the underlying EBITDA to 215.6m. The group generated an outstanding 461% growth in the underlying NPAT to $101.7m. Still the stock fell 24.86% in the last three months and 53.7% in the last six months (as of February 03, 2017). Resignation of board members, James Spenceley and Tony Grist, partly contributed to this decline. What concerned investors is the “difference of opinion” between these directors leading to stock crash. Investors were also concerned on whether Vocus would be able to reach their fiscal year of 2017 outlook. On the other hand, the group is undergoing transformation from the past two years to become a fully integrated high speed telecommunication network across Australia and New Zealand. This is through a series of merger and acquisition by leveraging the expanded infrastructure platform and market presence. Its dividend is in line with the growth of the business wherein the group has posted a 300% growth in the final dividend and 388% growth in the full year dividend to 15.6cps for fiscal year of 2016. Meanwhile, the group would be releasing their interim results on February 22, 2017 for the financial year of 2017. Although the 2017 outlook seems to be a mixed bag; quality to the underlying business based on continuing momentum in corporate and wholesale division, and growth in consumer broadband remain the growth drivers. We believe investors can leverage the current subdued levels in the stock as an entry opportunity. We give a “Buy” recommendation on the stock at the current price of – $ 4.09

 
VOC Daily Chart (Source: Thomson Reuters)

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