The Vocus Group Ltd (ASX: VOC) share price rocketed upwards by over 19% during August. Most of these gains were in the latter part of the month, after the release of its FY20 annual report.
Vocus is part of the S&P/ASX 200 Index (ASX: XJO) and is a company in the telecommunications sector. It has a very rich history and was originally founded by serial entrepreneur and venture capitalist James Spenceley.
FY20 saw Vocus Network Services (VNS) become firmly established as the company's core growth engine. This is a fibre network interlinking between third party and black spot networks to create a network that encompasses all of Australia, the pacific rim to Hong Kong and the east cost of the USA, as well as throughout New Zealand. This includes the North-West Cable System (NWCS), the only combined sub-sea telecommunications network and resources industry cable in Australia
What made the Vocus share price move?
FY20 was the first year in the company's 3-year turnaround plan, which is a strategy to trim the organisation back to 3 core areas of business. These are VNS, Vocus Retail, and Vocus NZ. Within Australia, the Vocus retail arm includes brands like Dodo and iPrimus.
One of the main focus points of FY20 was the completion of the Coral Sea Cable infrastructure. Overall, this project contributed to lower revenue and lower direct costs. Moreover, gross margin declined by 4% due to a %50 million reduction in the retail business. Nonetheless, earnings before interest, taxes, depreciation and amortisation (EBITDA) across the group remained stable due to disciplined overhead reductions.
However, it was the performance of the VNS that really drove up the Vocus share price in my view. In this business vertical the gross margin increased by 5%, and underlying EBITDA increased by 10%. New Zealand also delivered a 4% increase in EBITDA.
The year ahead
In my view, FY21 will be a positive year for the Vocus share price. The company plans to deliver an increase in underlying EBITDA of 6–10%, with the VNS to deliver between 8% and 12% growth. What's more, COVID-19 is accelerating market trends for New Zealand and VNS. Digitisation, automation, artificial intelligence, machine learning and 5G are all increasing demand for data connectivity and high bandwidth consumption.
Furthermore, large enterprises are increasingly adopting private and public cloud. As these trends continue, there is increasing demand for diversity of supply. Lastly, the Australia Singapore Cable became operational in FY20, so this asset can now be harnessed for international and domestic growth.
Foolish takeaway
With the ailing retail sector looking to return to growth by the end of Fy21, Vocus is clearly on target with its 3-year turnaround. This includes extracting greater value from its fibre cable network across Australia and internationally. Moreover, the company continues to spend CAPEX to build assets it can use to earn high-margin revenues.
Given the company has hit its FY20 targets, I expect FY21 to be a year of consolidation, leading to a year of strong growth for the Vocus share price in FY22.
