article 3 months old

Treasure Chest: Refocus On Vocus

Treasure Chest | Oct 31 2016

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

Credit Suisse is the latest broker to query the sell-off of Vocus Communications, suggesting a sizeable re-rating could be on the cards.
 

By Greg Peel

Coming into the August result season, Vocus Communications ((VOC)) was trading at around $9.00. The share price has tumbled ever since to be around $5.50 today.

The aggressive sell-off has been driven by investor concerns around recent changes to executives and the board of the company and the transition to the NBN, Credit Suisse suggests. The company has also now completed a rather protracted acquisition of NextGen, following a related capital raising.

Credit Suisse had been advising on that acquisition and as such has been on research restriction for several months. Back in April, the broker held an Outperform rating on the stock. It has now returned from restriction to reinstate an Outperform rating with a lower target price.

“If Vocus can demonstrate that the operating fundamentals remain on track,” says Credit Suisse, “then we see potential for a sizeable share price re-rating”.

The broker suggests the NextGen acquisition significantly enhances Vocus’ offering in the corporate internet protocol (IP) data market and has the potential to be the key driver of earnings growth. Given Vocus already pays high access costs to Telstra ((TLS)), the broker does not see access costs changing materially following the transition to NBN, which seems to be a major sticking point for the market.

Earlier in the month, Deutsche Bank admitted that troubles within the board did offer up risks, but the broker retained its Buy rating on Vocus nonetheless. Citi declared the share price sell-off to be overwrought, leaving the stock significantly undervalued. Citi upgraded its rating to Buy.

A month earlier, UBS was concerned about limited visibility with regard the trajectory of FY17-18 earnings growth and suggested re-rating of the stock may be limited, but this did not stop the broker upgrading to Buy on valuation in the wake of the ACCC’s approval of the NextGen takeover.

The FNArena database of major brokers now shows five Buy or equivalent ratings for Vocus and one Hold. The consensus target is $8.08, suggesting 43% share price upside.

The whole telco sector has been de-rated in recent months, Credit Suisse notes. The broker does not expect PE multiples to return to previous levels. But previous levels had become rather stretched with telcos in general wrapped up in the search-for-yield trade, and newer players like Vocus gaining extra attention through acquisitions and industry consolidation. When rival TPG Telecom ((TPM)) offered up a disappointing earnings result, Vocus was caught in the resultant downdraught.

With the stock, the sector and the market as a whole having reset on investor reallocations, the focus for Vocus will shift back to the underlying business, Credit Suisse asserts.  

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

TLS

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED