Why I think Vocus Group Ltd offers growth at this share price

Spare a thought for shareholders in Vocus Group Ltd (ASX: VOC) because they’ve had a pretty turbulent year.

They’ve seen the darling of their portfolio reach dizzying all-time highs, and then watched in horror as it plummeted to near rock-bottom lows.

However, since the doldrums it hit back in September, Vocus’ share price has seen a modest recovery.

So is this a sign we should get excited about this telco again, and is now the time for you to consider a focus on Vocus for your portfolio?

Vocus Group is an international telecommunications company headquartered in Sydney.

It owns and operates a surprisingly extensive fibre network within Australia and New Zealand and also connects its local customers with key international locations like Hong Kong, Singapore and the United States.

Together, its Australian and New Zealand network consists of over 25,000 km of fibre, and it is also currently in the middle of building the Australian Singapore Cable (ASC), a 4,600km subsea cable interconnecting in Perth and Singapore, which promises a 30% reduction in data transfer latency between Sydney and Singapore.

These thousands of kilometres of fibre cables stand out on Vocus’ balance sheet: the company’s fibre assets almost quadrupled between 2016 and 2017, and Vocus now values its network at almost $1.4 billion.

This massive year-on-year increase was mainly due to Vocus’ acquisition of Nextgen Networks for $793 million in October, 2016.  This acquisition brought with it not only the ASC project, but also the North West Cable System Project, a 2,000km long fibre network in the country’s North which connects offshore oil and gas facilities with onshore business infrastructure, and the Regional Backbone Blackspots Program, a 6,000km network reaching several key regional Australian “blackspot” locations.

On paper, this all sounds pretty exciting. Vocus is an expanding telco company with significant assets actively trying to challenge the established industry players by building and operating its own leading edge fibre network.

And it’s prepared to spend big money financing big projects. But all this investment does come at a significant cost – and it’s around about the time of the Nextgen acquisition that the company’s share price really started to fall off a cliff.

Between June 2016 and September 2017 the share price shed a whopping 75% of its value, hitting a four-year low of $2.28.

Risk-averse investors jumped ship, and those that remained were hit with a string of bad news in August: underlying NPAT for FY17 was $152.3 million (lower than the company’s initial guidance of $160-$165 million), and the company announced its intention to recognise a massive $1.5 billion impairment to goodwill in its FY17 results.

Plus, in the midst of all this, Vocus also told investors it would not pay them a full year dividend.

So where’s the good news?

Well, after the hammering it took earlier this year, the share price has recovered slightly to be just over $3 at the time of writing.  This could be due to a few things.

Firstly, that big goodwill impairment probably spooked the market and the stock could have very well been oversold.

Secondly, and more importantly, while its share price was plummeting Vocus was still quietly going about its business and meeting its production milestones for the ASC: the project was 57% complete as of November, on track for its July 2018 delivery date.

And the market may have finally started rewarding Vocus for its diligence. The ASC is a flagship project for Vocus, and if the company can continue to meet its targets investors will respond positively.

On the other hand, like any project of such significant size, there are risks it will go over budget or take longer than anticipated, and the market is a notoriously fickle friend in times of trouble.

One final thing to note is that Vocus has announced its intention to divest some of its non-core assets – even flagging the possibility of selling its New Zealand business, which it values at $500 million.

If it could find a buyer willing to pay that sort of asking price Vocus could effectively wipe out half of its balance sheet debt in one fell swoop.

Foolish takeaway

At current prices Vocus might be seen as a bargain to those growth investors with a positive outlook on its flagship ASC project. It has significant and valuable assets on its balance sheet, and relative to its competitors they’re selling cheap: its P/B ratio of 0.79 is well below TPG Telecom Ltd’s (ASX: TPM) 1.9 or Telstra Corporation Ltd’s (ASX: TLS) 2.85.

For those willing to take on the risk, Vocus currently offers some good growth potential at a decent price.

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Motley Fool contributor Rhys Brock owns shares of TPG Telecom Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and 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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