Are These 3 Telecom Stocks Good to Buy or Hold – VOC, TLS, 5GN

 

Stocks’ Details
 

Vocus Group Limited

 
FY19 Cash Conversion Remained Strong at 100%: Vocus Group Limited (ASX: VOC) is engaged in providing high-quality fibre and network solutions, linking all mainland capitals with Asia. The company is providing a telecommunication service platform across New Zealand and Australia. On 10 January 2020, the company announced that one of its Directors, Kevin Steven Russell has acquired 200,000 shares for a consideration of $594,399.51.
 
FY19 Highlights for the Period ended 30 June 2019: In FY19, the company reported revenue of $1,892.3 million, up marginally from $1,884.7 million reported in the year-ago period. During the period, growth in Vocus Networks Services (VNS) and New Zealand was offset by a decline in Retail. The company reported underlying NPAT at $105.5 million, a decline of 17% on a year over year basis.  Underlying EBITDA came in at $360.1 million, down 2% on a year over year basis. Cash conversion during FY19 stood strong at 100%, while the company reported a net debt of $1,034.4 million at the end of FY19.
 

FY19 Key Highlights (Source: Company Reports)
 
What to Expect: For FY2020, the company anticipates underlying EBITDA to come in the range of $359 million to $379 million and capex in the band of $200 million to $210 million. The company anticipates cash conversion to be roughly 90% to 95% for FY20. The company predicts EBITDA growth in Vocus Network Services to be in the range of $20 million to $30 million, offset by a similar fall in Retail.

 Valuation Methodology: Price to Earnings Multiple Approach
 
Price to Earnings Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: As per ASX, the stock is trading below the average of its 52-week low and high of $2.80 and $4.90, respectively. The stock gave a return of 10.34% on a year-to-date basis. The company’s debt to equity stood at 0.47x, lower than the industry median of 0.73x, reflecting a strong financial position. Considering the decent financial performance and current trading levels, we have valued the stock using P/E based relative valuation method and for the purpose, we have taken the peer group - Telstra Corporation Ltd (ASX: TLS), Nine Entertainment Co Holdings Ltd (ASX: NEC) and Seek Ltd (ASX: SEK), to name few. Therefore, we have arrived at a target price of lower double-digit growth (in % terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $3.36, up 2.439% on 15^th January 2020. 

 
Telstra Corporation Limited

 
T22 Strategy Implementation & Expansion of 5G Key Positives:Telstra Corporation Limited (ASX: TLS) is engaged in providing telecommunication and information services, which consist of mobiles, pay television and internet. On 15^th January 2020, the company announced the issuance of new securities, including 13,245,705 Retention Rights to eligible employees.The company also notified that 7,673,385 of ‘retention rights’ remain outstanding as on 15 January 2019.
 
Investors Day 2019 Update: The company recently confirmed that the T22 strategy is executing multiple jobs, which involves providing cost reductions and streamlining its business. The mobile business of the company is progressing to return to a more rational market as the company goes through the advancement of 5G. In NAS, Telstra is on track to attain profit margins in mid-teens via a continuous focus on cost cutting initiatives along with profitable NAS products.
 
Outlook: In FY2020, the company expects Capex to be in the range of $2.9 billion- $3.3 billion. Total income is expected to be in the range of $25.3 to $27.3 billion in FY20. Underlying EBITDA is expected to be between $7.4 to $7.9 billion.
 

Revised FY20 Outlook (Source: Company Reports)
 
Valuation Methodology: Price/Earnings Multiple Approach

Price/Earnings Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: As per ASX, the stock is trading close to its 52-week high level of $3.978. The stock gave a return of 7.54% on a year-to-date basis. Gross margin of the company stood at 63.8% in FY19 as compared to the industry median of 61.0%. The company has a market capitalization of ~$45.55 billion. We have valued the stock using P/E-based relative valuation approach and arrived at a target price, which is offering an upside of mid-single-digit (in percentage terms).Hence, considering the current trading levels, cost minimisation initiatives and the updated outlook, we recommend a “Hold” rating on the stock at the current market price of $3.840, up 0.261% on 15^th January 2020.
 

5G Networks Limited

 
Cash Receipts up 19%:An Australia-based telecommunication company, 5G Networks Limited (ASX: 5GN) is engaged in offering digital knowledge to the customers and government through data connectivity, cloud and data centre, and managed services. As per a recent update, the company has partnered with Servers Australia for the indirect channel for an initial term of 2 years, including a minimum spend of $750,000.
 
December Quarter Highlights: On 14^th January 2020, the company provided an update for the December 2019 quarter. During the period, the company generated net operating cash flow of $1.974 million.Net cash used in investing activities stood at $845K, whereas net cash used in financing activities came in at $1.383 million. The company exited the quarter with cash and cash equivalents of $2.813 million. For the coming quarter, cash outflow is expected to be ~$12.414 million. The company reported cash receipts of $14.6 million during the quarter and $28.1 million in the half year period, indicating a rise of 19% from the prior corresponding period.
 

Estimated Cash Outflow (Source: Company Reports)
 
What to Expect: For FY20, the company predicts revenue to be in the band of $55 million to $65 million and EBITDA is likely to increase in the range of 8% and 12%, which excludes the latest buyouts. 
 
Stock Recommendation:As per ASX, the stock is trading slightly below the average of its 52-week high-low of $1.715 and $0.470, respectively. The stock went up by 33.33% on a year to date basis and 85.45% in a year’s time, respectively. As on 15 January 2020, the company’s market capitalisation stands at ~$66.89 million with 65.58 million outstanding shares. The company is working towards the expansion of its network and data centre product through acquisition synergies and organic growth. Further, the company also plans to expand its customer base on the back of cross and upsell approach. The recent partnership with Servers Australia will strengthen the 5GN channel strategy for accelerating revenue growth.On the valuation front, the stock is trading at price to book value multiple of 4.1x, as compared to the industry median of 3.3x on TTM (Trailing Twelve Months) basis. Considering the aforesaid facts, we give a “Speculative Buy” rating on the stock at the current market price of $0.990, down 2.941% on 15 January 2020.
 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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