Moving Parts

Vocus Communications held its long-awaited 2017 investor day recently, some six weeks after the start of a rollercoaster ride for its shares in the wake of its cut in full-year guidance for FY17, and one week since the $3.50 a share takeover proposal from Kohlberg Kravis Roberts & Co (KKR).

 

That FY17 guidance was reiterated and management went to great lengths describing the steps that have been taken in order to realise the full potential of the assets that have been put together over the last two years. Change isn’t expected to occur overnight, however, and while the transformation plan laid out was encouraging, it could take up to three years for Vocus to realise its full potential, with circa 40% of the benefits after one year and around 60% after three years.

 

Given the company’s large capital commitment for the 4600-kilometre Australia Singapore Cable (ASC) project, we expect Vocus to preserve capital by cutting or suspending its dividend and cutting back on non-ASC capital expenditure. This should not affect the company's ability to continue growing its top line, however.

 

Vocus remains fully committed to the ASC project, which is essential to attract customer commitment. Discussions with potential foundation customers have lingered on spectrum sharing and the rights to access potential future increases in capacity as a result of technological advances.

 

We note that cash flow conversion should improve in FY18 as the lingering effects of the M2 and Nextgen acquisitions unwind. Management went into great detail laying out the sources of the working capital drag this year that has negatively impacted cash flow conversion, mostly as a result of deferred revenue unwinding and subscriber acquisition costs normalisation due to the Nextgen and M2 acquisitions and not due to bad debts. It expects conversion to return to normal, i.e. more than 90%, by FY18.

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