Vocus Group Limited

Non-Binding Proposal to Acquire Vocus Shares By AGL: Vocus Group Limited (ASX: VOC) provides fibre network services. The company granted exclusive access to AGL Energy Limited (ASX: AGL) to conduct due diligence on Vocus Group Limited for a period of four weeks after submitting a non-binding, indicative proposal to acquire Vocus at $4.85 per share via Scheme of Arrangement.
 
The interest of AGL to acquire Vocus is in-line with the strategy of AGL to meet the needs of increasingly connected customers as energy & data value streams converge and the traditional energy sector transforms, aligned with the capabilities of AGL in integrating and managing complex assets & customer portfolios.
 
The strategic rationale includes customer loyalty and operating cost benefits from the integration of the customer platforms of the two companies and development of a multi-product offering across energy & data. The acquisition will increase the opportunity to enhance untapped growth potential in the high-quality broadband fibre infrastructure network of Vocus, along with the generation of further incremental value from these assets as a result of the combination with AGL.
 
The acquisition will provide an opportunity to develop new and innovative products and services for customers as energy and data products and services converge further in the future. AGL continues to assess the funding of any transaction but intends to utilize existing cash and new debt facilities, subject to the maintenance of its Baa2 credit rating, as this will be accretive to AGL’s EPS in the first twelve months, post-acquisition.
 

1HFY19 Financial Metrics (Source: Company Reports)
 
The revenue of the company stood at $974.2 million in 1HFY19 against the prior corresponding period, an increase of 1%, primarily on the back of growth in Vocus Networks but offset by declining revenues in Vocus Retail segment. The underlying EBITDA (excluding share-based payments) decreased by 7% on the prior corresponding period to $176.4 million. Vocus improved its cash conversion to 93%, from a comparable base of 87%, which is primarily driven by various factors such as received upfront cash payments of $26.5 million related to ASC long term contracts, net finance payments of $4.8 million & income tax payments of $5.1 million, and an increase in net working capital of $19 million.
 
EBITDA Expectations: Underlying EBITDA is expected to be in the range of $350 million to $370 million in FY19. Moreover, for FY19, the company expects capex to be in the range of $160 million to $170 million. VOC is investing in FY19 to support revenue and earnings growth in FY20 and beyond. The company expects the second half of FY19 to be stronger than the first half, with further cost savings across the business and from the benefit of the Optus MVNO (path to 5G and economics constructed for scale growth) deal.
VOC is backed by several strong business drivers which include Australia Singapore Cable launching, accelerating new sales momentum in Vocus Networks-Services and the Optus MVNO deal signed in December by the company. Further, with the current Non-Binding Proposal with AGL, we expect that synergies can be attained through the acquisition if it leads to a binding agreement post due diligence. Hence, we maintain our “Hold” recommendation on the stock at the current market price of $4.170 per share (up ~8.877% on 11 June 2019).
 

Telstra Corporation Limited 

Strong Growth in Customer Numbers:Telstra Corporation Limited (ASX: TLS)provides telecommunication and information services to its domestic & international customers.The company expressed its expectation of making a non-cash impairment and writing down the value of its legacy IT assets by approximately $500 million. It also increased the guidance on its restructuring costs by approximately $200 million for FY19.

On the financial front,EBITDA of the company stood at $4.3 billion in 1HFY19, down by 16.4%, and NPAT stood at $1.2 billion, down 27.4%, primarily driven by NBN impacts. The cost declined significantly and is on track to meet FY19 targets as a part of company’s goal to achieve $2.5 billion net productivity improvement by 2022. The company’s performance remains decent excluding the impact of the NBN.


Results Half-Year ended 31-December 2018 (Source: Company Reports)
 
EBITDA Guidance: In FY19, the company expects a total income in the range of $26.2 billion - $28.1 billion and EBITDA (excluding restructuring costs) between $8.7 billion to $9.4 billion. The free cashflow is expected to be at the lower end of the guidance range for two main reasons including, cash capex will increase as the company takes advantage of opportunities in the enterprise and wholesale fibre markets and cash redundancies will be higher as it accelerates productivity. The outlook of the company remains strong on the back of strong growth in the customer numbers, significant progress on the 5G spectrum front, and the progress in executing T22 strategy.

Stock Recommendation:Meanwhile, on the price performance front, the stock yielded a YTD return of 35.58%, and its 6-months return stood at 21.93%. Hence, considering the decent business outlook amidst certain challenges and the short-term stock performance, we maintain our “Hold” recommendation on the stock at the current market price of $3.750 per share (up, 0.806% as on 11 June 2019).

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