Vocus Group owns and operates a fibre network covering 30,000km with reach across metropolitan, regional and international markets. The network includes a 4,600km submarine cable from Perth to Singapore, 17 data centres and 5,000 on-net buildings. The main networks segment accounts for 70% of operating earnings (EBITDA) and services a total of 1,100 wholesale customers, more than 5,000 enterprise customers and 200 high-revenue government customers. Vocus is leveraged to the growth themes of rising data consumption, cloud adoption, managed services and unified communications.
Vocus is half-way through a three-year growth strategy to generate higher returns in the network segment and stabilise the performance of the retail brands. Operational progress has been positive and we see potential upside in the reward-risk balance during FY21. Vocus holds assets in desirable pockets of market growth, and is on track to generate higher free cash flow and returns on capital.
Enterprise, government and wholesale customers are likely to have increased bandwidth requirements during the second half of FY20, responding to higher network demand. Incremental revenues are high-margin, and we expect these to help the company post EBITDA within the FY20 guidance range of $359–$379m, pre share-based payments. We anticipate some normalisation of activity levels into FY21, although we also expect enterprise and wholesale customers to reserve higher levels of bandwidth as demand for unified communications and cloud adoption rises sharply.
We understand Vocus is seeking to refinance debt facilities during 2020. We expect the refinancing to be supported, albeit with a 50bp rate rise from FY21. Organic growth is likely to support free cash flow growth, and debt repayment of $80m during FY21 and FY22. Further deleveraging of the balance sheet is likely to be a positive share price catalyst and we see the net debt to EBITDA ratio falling to about 2.0x during FY22.
On resuming coverage of Vocus we have upgraded our recommendation to Buy from Hold, while we have trimmed our target price to $3.47 from $4.00.