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Vocus Communications Limited & TPG Telecom Ltd: 2 telco shares roaring higher

Credit: Terence King

As one of the most widely-held shares on the ASX, Telstra Corporation Ltd (ASX: TLS) is understandably a closely watched stock.

So it’s interesting to note that in calendar year 2016 the stock has underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), declining by 4% compared with a fall of around 2% in the index.

In contrast, two of Telstra’s main ASX-listed rivals, TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC) have experienced share price gains of 10% and 17% respectively.

Musical chairs

While Telstra and Optus remain the giants within the telecommunications (telco) industry, their smaller rivals have certainly beefed up over the past year.

iiNet was acquired by TPG in a $1.6 billion deal. Meanwhile, Vocus first merged with Amcom Telecommunications in a deal which valued Amcom at around $700 million. The enlarged Vocus then followed on by instigating a merger with M2 Group.

The mergers and acquisitions have had a significant effect on the size of these two firms with TPG Telecom now commanding a market capitalisation (cap) of $9.25 billion, while Vocus has a market cap of $4.7 billion.

NBN to level the playing field

Of course the biggest change sweeping through the Australian telco sector is the roll-out of the national broadband network (NBN).

This has the potential to alter the status quo as companies like Vocus will no longer have to negotiate with Telstra for access to it’s in the ground infrastructure. Instead, Vocus, like Telstra will become wholesale customers of the NBN.

The growing rate of data consumption and services such as data centres to support customers’ appetite for data certainly supports the view that there is a demand tailwind which the telcos are enjoying.

While demand does look set to rise significantly, investors also need to consider the supply side of the equation as there is no certainty that data growth will automatically translate into profitable growth for the telco stocks.

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Motley Fool contributor Tim McArthur owns shares in Vocus Communications Ltd.  The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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