Yesterday evening, after market close, telecom company Vocus Group Ltd (ASX: VOC) updated the market regarding its full year 2017 forecasts – and the news was not good. Here's what you need to know:
- Full year 2017 underlying net profit after tax (NPAT) expected to be $160 million to $165 million, compared to previous guidance of $205 million to $215 million
- Company also expected to book non-cash significant items of $113 million, with $61 million reduction in acquired intangibles and $26 million reduction in acquired software values
- Net debt is expected to be $1.1 billion based on this forecast, with net leverage expected to rise to 2.6x (bank covenants limit this to 3.5x)
- Synergies expected to reach $57 million this year in line with guidance
So What?
Well, it's unwelcome news all around really. Vocus' profits are now expected to be around 20% to 25% lower than was previously forecast, for a variety of reasons. The first reason is an accounting change that will result in $100 million of revenue being recognised in future periods instead of this year.
Second, the impact of lower than forecast customer billings combined with an increase in employee headcount. There were also a variety of miscellaneous issues including higher than forecast IT costs, lower earnings in one segment due to recent cyclone events, and 'other trading variances across the group'.
The forecast profit is underlying profit – which excludes the impact of one-off 'significant items' of $113 million. Still, based on these forecasts, Vocus is priced at around 13x its underlying profit forecast.
Now What?
Debt is the big issue, with the company's ability to pay coming into focus. Leverage, which is net debt divided by earnings before interest, tax, depreciation and amortisation (EBITDA), is quite high at 2.6x. The debt doesn't appear unmanageable as management has a few levers they can pull, like reducing capital expenditure, to free up some cash. Today's downgrade is also likely to fuel the rumours of a possible private equity takeover.
Speaking for myself, I'm still more inclined to be a buyer than a seller at today's prices, although today's announcement does raise the question of 'are there more cockroaches in the Vocus kitchen?'
