I think that Vocus Group Ltd (ASX: VOC) is an opportunity at today's share price of $2.43, and I have previously purchased shares slightly above these prices before the (now-withdrawn) KKR and Affinity takeover bids.
Sure, investors are dumping their shares in droves as the core business is under-performing, Vocus has cut its dividend, and so on. But there are three primary reasons I think the company is an opportunity:
- It's unlikely to get into deep financial strife
While debt is quite high, the company has several opportunities to pay down debt such as reducing the dividend (check), selling assets (maybe), and/or raising capital (hopefully not). I think it likely that the company will need to sell non-core assets, as ongoing capital expenditure requirements are high.
In my opinion the investment hinges on this point, and would-be shareholders should do their own evaluation of the company's financial position before considering a purchase.
- Customer demand is only increasing
Data will be here forever and Vocus' network of cables guarantee it at least some intrinsic value over the next 20 years or so (assuming that debt doesn't get out of control; see above). With reliable demand for its services and long-lived assets, I think the current sell-off of Vocus' shares is discounting the company's long-term future. That said, if you assume that Vocus' earnings remain constant, the company still doesn't look particularly cheap. Fortunately however:
- It has several growth opportunities
While the acquired businesses aren't looking very good currently, Vocus can grow earnings via its fibre networks, including the under-construction Australia Singapore Cable (ASC). The company is also growing its market share in both Australia and New Zealand's broadband markets, where it remains a minority player. As customers increasingly migrate to the NBN, Vocus' retail operations could become meaningfully larger over time.
Additionally, the company has been in damage-control mode for much of the past 12 months as it attempts to integrate its multiple acquisitions. There has been significant progress on that front, and in the future, executives should be able to return their focus to growing the business.
For these reasons I think Vocus' shares today will have proven to be quite cheap in 3-5 years time.
