Vocus Group Limited

Non-Binding Proposal to Acquire Vocus Shares By EQT: Vocus Group Limited (ASX: VOC) is a specialist fibre network services provider. Vocus Group Limited as on 27 May 2019, confirmed that it has received a confidential, non-binding, indicative proposal from EQT Infrastructure to acquire all the shares in Vocus at a price of A$5.25 per share in cash, to be implemented by way of a scheme of arrangement. The proposal is, however, subject to several conditions, including completion of due diligence by EQT, securing committed financing, etc.

Vocus Group’s Board has already granted non-exclusive due diligence access to EQT so that EQT can put a formal binding proposal to Vocus which is likely to take a number of weeks. The company has advised Vocus shareholders that at this point of time, they do not need to take any action regarding the Indicative Proposal. Vocus has appointed UBS as its financial advisor and Allens as its legal adviser.


1HFY19 Financial Metrics (Source: Company Reports)
 
The revenue of the company increased by 1% to $974.2 Mn in 1HFY19 against the prior corresponding period. It was primarily supported by growth in Vocus Networks but offset by declining revenues in Vocus Retail segment. Underlying EBITDA (excluding share-based payments) decreased by 7% on the prior corresponding period to $176.4 million. The cash conversion of the company has improved to 93%, from a comparable base of 87.This improvement was largely 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.
 
With Optus MVNO deal signed in December 2018, VOC will be able to participate in the wireless broadband and mobile market along with the upcoming 5G environment as it is well equipped to take the advantage in the wireless market across all its brands. 

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 has been 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 EQT, we expect that VOC will continue its growth momentum going forward, hence, we maintain our “Hold” recommendation on the stock at the current market price of $4.680 per share (up 2.857% as on 28 May 2019).
 

TPG Telecom Limited

Decent Underlying Profit growth in 1HFY19: TPG Telecom Limited (ASX: TPM) is engaged in offering internet, mobile and fixed line services to its customers including residential user, small and medium enterprises, government, large corporate enterprises, and wholesale clients.

As per the update released on 8 May 2019, the Australian Competition and Consumer Commission (ACCC) has opposed the proposed merger between TPG and Vodafone. ACCC Chair is of the view that there will be a real chance of TPG to roll out a mobile network if the proposed merger with Vodafone does not take place. Additionally, TPG has been referred as a potential competitor in the mobile industry and prices would fall if TPG enters as a new mobile operator.
TPG updated on 24 May 2019 that it has filed a statement of claim with the Federal Court for seeking approvalfor the proposed merger. Proceedings have been lodged and TPG advised that the proposed merger between the two will not have the effect, or likely effect, of substantially lower competition.


Results Summary 1H FY19 (Source: Company Reports)
 
The revenue decreased by 1.5% over the prior corresponding period with $1,235.8 million in 1H FY19 as compared to $1,254.6 million in 1H FY18, due to the loss of home phone voice revenue driven by NBN rollout. The underlying EBITDA increased from $413.0 million in 1H FY18 to $424.4 million in 1H FY19, an increase of 2.8% over the prior corresponding period, primarily on the back of other EBITDA growth achieved relative to 1H FY18. Other EBITDA growth was mainly driven by growth in the Corporate Division (including an uplift in contribution from the VHA fibre contract) and the continued realisation of operating expense efficiencies across the Group. 

The Group’s broadband subscribers at the end of FY18 came in at 1.93 million, a 5k (0.3%) decline year-on-year. However, included within this movement was a significant change in the composition of the broadband customer base with NBN subscribers increasing by 300k to 861k, representing a 45% of the total broadband customer base as at the year-end.

EBITDA & Capex Guidance: The company’s Directors reaffirmed the guidance provided in September 2018 for ‘Business as Usual’ EBITDA for the group for the full year FY19 to be in the range of $800-820 million and capex to be in the range of $180-220 million.

Stock Recommendation:The stock is trading at a price to earnings multiple of 24.62x with the market capitalisation of ~$6.03 billion. There has been a significant decrease in employment and overhead costs which reflected the results of ongoing operating cost optimization work.

Moreover, the  mobile network of the company achieved an extraordinary nationwide outdoor coverage performance result in Singapore, along with growth in underlying financial key performances against the prior corresponding period. Considering the aforesaid parameters and current trading level, we presume that the company will perform well going forward, hence, we maintain our “Hold” recommendation on the stock at the current market price of $6.310 (down 2.923% on 28 May 2019).
 

Telstra Corporation Limited 

Strong Growth in Customer Numbers:Telstra Corporation Limited (ASX: TLS)is one of the leading telecommunication and technology players in Australia, offering telecommunications and information services for domestic and international customers.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 company was able to reduce costs significantly and is on track to meet FY19 targets as a part of the goal of achieving $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.

Meanwhile, on the price performance front, the stock yielded a YTD return of 28.65%, and its 6-months return stood at 20.80%. 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 $3.560 per share (up 0.85% on 28 May 2019). 

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