Shareholders in Telstra Corporation Ltd (ASX: TLS) should look away as the stock has crashed to a fresh seven-year low. Adding insult to injury, Citigroup is suggesting that the ugliest dog in the sector may actually be a better bet than Australia’s largest telco.
I am talking about embattled and unloved Vocus Group Ltd (ASX: VOC), which has lost its chief executive and chairman as a result of numerous profit downgrades.
If you thought Telstra was a stinker, then it might bring you some comfort to know that the share price of Vocus has shed two-thirds of its value over the past two years compared to the “mere” 51% loss in Telstra’s value.
Even TPG Telecom Ltd (ASX: TPM) and Amaysim Australia Ltd (ASX: AYS) are faring better with losses that aren’t too far off Telstra’s. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index has rallied 13% over the same period.
But every dog has its day and Citigroup thinks its Vocus’ time to shine with the appointment of its new chief executive (or is it chief rescue officer?) Kevin Russell.
“We expect him to stabilise the business following a string of downgrades,” said Citigroup.
“Near term the balance sheet remains in questions as the net debt/EBITDA [earnings before interest, tax, depreciation and amortisation] stands at 2.7x and will extend to 3.5x as they need to cover the US$110m bill for the Singapore cable.”
If Russell can’t stem the earnings bleed relatively quickly, Vocus may need to undertake a capital raising to “clear the air and allow Vocus to move forward”, added the broker.
I suspect a capital raise is unavoidable. The new chief rescue officer gets one free kick to tap shareholder for cash and I wouldn’t have thought he would pass up on the chance to beef up the balance sheet and rebase the share price so he can claim credit for the potential recovery in 12 months.
In any case, Citigroup believes Vocus is a better bet than Telstra because Vocus’ wounds are largely self-inflicted from its messy acquisition strategy.
On the other hand, Telstra’s issues are more structural in nature and such issues are much harder to address.
Further, Vocus isn’t as impacted by margin pressure from the national broadband network and its earnings turnaround is in easier reach than it is for Telstra.
I am a long-time shareholder of Vocus and I have grown a strong distaste for the stock (I only sold part of my holdings and I wish I sold it all).
But I agree with Citigroup’s assessment of the situation. It is much easier to see a rebound in Vocus than it is for Telstra and the bigger drop in the former’s share price means it probably makes a better value buy.
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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and Vocus Communications 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 Scott Phillips.
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