Vocus Group Ltd (ASX:VOC) shares are down almost 70% in the past one year.
There's been a steady stream of news from Vocus, most not so good. There's been management ructions, an evolving and more competitive telecommunications landscape, and a recent earnings downgrade. No wonder, the shares have suffered mightily.
Is Vocus a steal at these prices? Or is it a value trap?
According to the recently lowered guidance provided by the company, operating profit (EBITDA) at the mid-point of guidance is expected to be $370 million. On an Enterprise Value (EV) to EBITDA basis that's a forward multiple of 7.6. That's not cheap relative to other telecommunications players. Telstra Corporation Ltd (ASX:TLS), based on consensus estimated for 2017 operating profits, is trading at a forward EV/EBITDA multiple of 6.5! Compatriot TPG Telecom Ltd (ASX:TPM) is on a forward EV/EBITDA multiple of 8.
I believe TPG's entry into mobile with its own spectrum and network will have a profound impact on the competitive environment. TPG can be expected to increase its share of mobile aggressively and might offer attractive broadband plus mobile bundles to win customers. If this scenario eventuates, it's going to pressure Vocus' consumer broadband and voice business.
Vocus' data centre business is also facing fierce competition from carrier and vendor neutral providers such as global giant Equinix, Inc. (NASDAQ:EQIX) and national player Nextdc (ASX:NXT).
In my view, Vocus' core fibre business where the company sells fibre connectivity as wholesale to other carriers or directly to enterprises is stable. The question, though, is whether or not the core business, which possibly has much higher margins compared to the rest of the segments, can lift earnings enough to bring Vocus back to growth.
I wouldn't be rushing to buy Vocus. It's not obviously cheap compared to competitors which, in my view have a better competitive position.
