Another profit downgrade for Vocus, another plunge

Another profit downgrade for Vocus, another plunge

One of Rivkin’s mantras, ‘downgrades come in threes’ is on track to being realised for Vocus (VOC). Unfortunately for VOC shareholders, earlier this month the company announced its second profit downgrade in seven months. Both revenue and profit forecasts were downgraded with FY17 EBITDA revised down by approximately 15%.

The revenue decline was largely due to revenue from a number of large projects being pushed back to future periods. VOC previously downgraded profit guidance in November last year which came shortly after the resolution of board issues that led to the resignation of two VOC board members.

Both of these factors led to a severe decline in the share price that has continued unabated since then. The profit downgrade earlier this week led to a sharp 27% decline immediately following the announcement although the shares have since recouped around half of those losses. Part of the reason for the bounce in share price has been speculation that the company is attractive to private equity firms at these low prices. The possibility of a takeover offer seems to be providing a boost to the share price although it this stage it is all rumour with no formal bids actually on the table.

VOC owns brands Dodo and iPrimus through which it provides consumer NBN plans. So far this year, NBN subscribers are up 28.1% on December 2016, highlighting the opportunity in this area. The level playing field with regard to obtaining new NBN customers has provided the smaller telecommunications providers (like VOC) the ability to obtain a greater market share compared to what they had with broadband.

This fact has weighed on the TLS share price as its internet customer base was at risk of being poached by the smaller players offering cheaper plans.

Although this all sounds great for VOC, there is an elephant in the room.

NBN Co. has been structured by the government in such a way as to provide a reasonable return on investment. The problem is that the NBN cost so much to build that NBN Co is forced to charge relatively high wholesale prices for access to the network. Since consumers are not willing to pay much more for their internet than they were paying previously, the profit margins of the internet providers have been squeezed relative to what they were making with broadband. How this will all play out is still unknown since there is now pressure on NBN Co to reduce its wholesale pricing, but it is certainly a risk for the industry.

Today the Australian Competition and Consumer Commission (ACCC) issued a ruling stating that the smaller internet services providers could pass on the so called NBN tax to customers. This tax is designed to fund the future deployment of wireless and satellite services for regional Australia. The implications of the ruling are that smaller providers can now compete more effectively with the large telcos who could absorb the tax more easily. The news appears to have contributed to a 3% fall in the VOC share price today.      

Although the stock may now look cheap, there is a good chance of further profit downgrades. As we have stated in the past, we would prefer to miss the early part of any bounce with the knowledge that the worst is behind the company than to try to catch a falling share price. Although rumours would suggest there is the possibility of a private equity bid at some point in the future, this is just speculation at the moment. We therefore advise staying clear of VOC at least until its reported results stop deteriorating. 

    


If you'd like to talk about your portfolio, please contact me at william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.

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