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Sorry mum, you own Vocus Group Ltd shares

It’s tough, but my Mum’s very modest retirement portfolio has lost thousands of dollars recently, with the Vocus Group Ltd (ASX: VOC) share price plummeting 60% over the past few months.

Worst of all, it was my idea for her to hold the shares. 

Yikes.

Vocus Share Price

VOC share price

Source: Google Finance

In case you are wondering, my dearest mother did not buy shares before the incredible 420% run-up from 2013.

My mum is deep in the red on Vocus.

She got the shares as part of Vocus’ takeover of M2 Group, the owner of Dodo, iPrimus and Commander, back in February 2016. That was before Vocus went and bought NextGen networks and made a decision to invest in two projects for $861 million.

It’s been smooth sailing eve…

Not quite.

Since Vocus went on its takeover binge, the company’s hangover has only gotten worse. As the days since NextGen have gone by, the Vocus share price has fallen from almost $9 to a low today of $2.39.

3 Key Risks

The way I see it, there are three key risks facing Vocus right now.

Accounting

Integrating many different businesses into one big company promises shareholder riches and big bonuses for CEOs.

But while the cultural fit is one thing, accounting for expected ‘synergies’ and other benefits is another. It is tough, to say the least.

However, some of Vocus’ critics had already called its accounting into question before the question marks over the mega-acquisitions of M2 and NextGen came to the forefront.

Earlier the week, the company took the scalpel to its profit forecasts, with one of the charges being a result of a $40 million accounting policy change. Basically, the company chose to defer revenue over multiple years opposed to recognising it upfront. It also took a $10 million charge for “trading variances”.

To their credit at least it appears management are using the broom to clean skeletons from the closet — opposed to sweeping them under the rug.

Pleasingly, and although it will be challenging, the company expects to keep generating important synergies from its two most recent deals.

Debt

Vocus has heaps of it.

With falling operating profit, the company expects net debt to push out to $1.1 billion. That would place the company on a debt to operating profit multiple of 2.6 times, which is within the debt covenant of 3.5 times. There is breathing room in that multiple but I suspect the company will cut its dividend in exchange for maintaining capital expenditure.

NBN

The NBN is the big unknown for many investors. However, it appears Vocus is bounding ahead with its promise to broaden its subscriber base under the National Broadband Network. The company’s most recent update shows that its NBN order share was 10.2% in the third quarter, with a lower churn rate than customers on copper cable networks.

Foolish Takeaway

Mum’s Vocus shares are down a long way from their cost price. However, at today’s prices, I think Vocus shares offer more upside than downside. It won’t be an easy road back to profit growth — far from it in fact — but I think the underlying business still holds promise for shareholders with a long-term view.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of Vocus Communications Limited. 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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