This morning, telecoms provider Vocus Communications Limited (ASX: VOC) announced its results for 2016. Revenue was up 454.6% to $830.8 million and net profit after tax (NPAT) rose 222.9% to $64.1 million. The market response was solid with shares up 2.4% to $8.54 in early afternoon trading.
These statutory figures do not represent the underlying performance of the business due to the acquisition of Amcom Telecommunications and merger with M2 Group during the year. On an underlying basis, NPAT rose 460.5% to $101.7 million and perhaps the most useful metric of all is underlying diluted earnings-per-share (EPS) which rose 71.9% to 29.9 cents.
To add further complexity, Vocus is currently in the process of completing the purchase of Nextgen Networks and North West Cable Systems for an initial $807 million. The deal is subject to regulatory approval, but Vocus has already raised $652 million of new capital to help pay for it.
Amcom was acquired on 8 July 2015 and so it is fair to say that most of its contribution to the group is included in Vocus' 2016 result. However, M2 completed on 22 February 2016 so Vocus' 2017 results will be significantly boosted by a full year contribution from this business as well as from the Nextgen transaction should it go ahead.
My rough calculations imply that once all acquisitions are fully bedded down, Vocus could be on course for $500 million in annualised earnings before interest, tax, depreciation and amortisation (EBITDA). Given the company's enterprise value is tipping $6 billion, the stock is therefore trading on an enterprise value-to-EBITDA multiple (EV/EBITDA) of 12. This isn't cheap but it doesn't look hugely expensive either, especially when compared to rival TPG Telecom Ltd (ASX: TPM) which is trading on an EV/EBITDA of over 15 based on underlying guidance for 2016.
Still, my estimates may be wrong (it wouldn't be the first time) and actual profitability will largely depend on Vocus' ability to integrate its recent acquisitions as well as continued organic growth.
Interestingly, Vocus makes the point in its Review of Operations that it is expecting its retail arm, formerly M2 Group, to benefit from the upcoming churn event as consumers switch to the NBN. The company's NBN subscribers increased by 65.9% to 68,000 in 2016 and it now has 6.4% of the NBN market.
Estimates show that uptake of the NBN is likely to accelerate in the coming years which could be good news for Vocus. Amaysim Australia Ltd (ASX: AYS) is another company hoping to take advantage of the switch over and recently announced the launch of its own broadband business.
