The Vocus Group Ltd (ASX: VOC) share price fell 6% to $2.69 after the company released its half year results this morning. Revenues rose 4% to $973.6 million on an 'adjusted pro forma' basis, which adjusts to account for the acquisitions that Vocus has made since the first half last year. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew 0.8% to $188.8 million.
Significant items, primarily amortisation of customer and software intangibles, lead to a wide gap between reported and 'underlying' earnings. On a reported basis, Vocus net profit after tax (NPAT) fell 21% to $37.3 million and earnings per share were 6 cents per share. On an underlying basis, net profit after tax was down 25% to $68.6 million, and earnings per share were 11 cents.
Vocus again elected not to pay a dividend in order to pay down debt. Cash flow from operations was $86 million, but total debt actually increased due to heavy investment in the Australia-Singapore Cable (ASC) and the acquisition of Nextgen, Switch Utilities, and Smart Business Telecom. Net debt increased 2% to $1.1 billion.
I think Vocus plays a risky game with its debt and I think it is highly likely at this point that it will have to divest some of its businesses or raise capital. The company stated it has started a formal sale process for its New Zealand business, with a divestment expected to be complete by 30 June 2018.
It was overall a poor result from Vocus, with a sharp dive in profits and narrower consumer margins even despite a growing market share. This company has a stretched balance sheet and the turnaround is increasingly looking like it will be a drawn-out process.
Vocus' '$20 by 2020' seems little more than a pipe dream at this point:
I hold Vocus and think the company is a reasonable turnaround opportunity. However it is likely to be a painful process and I would call it a 'hold' today.
