How Vocus Communications Limited just struck digital gold

Shares in fibre-optic internet, cloud services, data centre and home broadband business Vocus Communications Limited (ASX: VOC) edged higher in morning trade after the company completed a deal to construct its Australia Singapore Cable.

Vocus has contracted Alcatel Submarine Networks to complete the engineering project, which is expected to complete by August 2018 at a cost of around US$170 million to be partly funded with a mixture of debt and operating cash flows.

Notably the company also expects around US$100 million of the cost to be met by clients paying up for access to the cable prior to its operational commencement.

In today’s announcement Vocus referenced a report suggesting that by 2029 it could be earning US$550 million in annual revenues from the cable due to the exponentially growing demand for bandwith between Australia and Asia. Notably these types of cable and fibre-optic businesses have super-high profit margins as once the upfront investment is made a huge amount of new clients can be offered capacity for an extremely low incremental cost.

This kind of operating leverage is true of Vocus’s extensive inner and inter-city fibre network that continues to post strong revenue and profit growth. Net new monthly recurring revenue over Q1 2017 for just the corporate dark fibre access business was $1.35 million, with accelerating sales growth meaning the company was unable to keep up with demand on its “provisioning resources”. This kind of embarrassing admission is indicative of why the share price has been sliding on concerns around management in-fighting, although the telco has since hired more staff and expects the problem to be addressed by January 2017.

Vocus now has around 30,000kms of fibre networks across Australia and New Zealand and a total of 23 data centres. This compares favourably to current market favourites Nextdc Ltd (ASX: NXT) and Superloop Ltd (ASX: SLC) that have both soared in share price value over 2016 due to their leverage to growth in demand for enterprise cloud services via data centres and fibre network provisioning.

However, the likes of Vocus and TPG Telecom Ltd (ASX: TPM) have travelled in the opposite direction after TPG warned of falling margins across its home broadband services thanks to the arrival of the NBN.

I suspect once the market wakes up to the fact that both TPG and Vocus are much more than home broadband businesses then their share prices will start rocketing higher. Tomorrow, TPG is expected to hold an AGM where investors will be keen to see if it provides an update to its profit guidance provided last September.

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited and Vocus Communications Limited.

You can find Tom on Twitter @tommyr345

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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