Vocus Group Ltd (ASX:VOC) delivers on guidance, forecasts flat year

Shares in home broadband business and corporate dark fibre provider Vocus Group Ltd (ASX: VOC) have edged higher after the group reported an “underlying profit” of $127.1 million on revenue of $1.9 billion for the financial year ending June 30, 2018.

Investors also breathed a sigh of relief after management met their “guidance” with EBITDA coming in at $366.1 million, which was 7% above the prior year.

After a spate of mergers, acquisitions and a significant capital expenditure project in the form of the Australia Singapore Cable net debt stood at a $1 billion which was better than guidance, with the group also negotiating an extension to its debt facilities in June 2018.

Given the debt problems, cash flows, and upcoming capital expenditures no dividend was declared and investors shouldn’t hold their breath for a return to dividends.

The group’s strongest business remains the legacy dark fibre Vocus business that grew EBITDA 15% on revenue growth of 11%, while its New Zealand home internet business is also performing well under the Slingshot and Orcon brands.

The home internet businesses under the legacy M2 business (including dodo) continue to face profit margin erosion problems, churn, and increased competition as a result of the nbn network. In this division the EBITDA margin slipped 0.3% t0 10.7%, with overall revenue down 1%.

The corporate internet services brand under the Commander brand saw revenues fall 15% in a result where the group owned up to poor execution, weak customer service and a “mismanaged NBN opportunity”.

One area investors are hoping for growth is with the Australia Singapore Cable that will provide wholesale internet connections across South East Asia. It is due to become operational by September and Vocus yeterday announced it has sold 2.5tbs of capacity on the cable, although details as to the financial return on investment were again light on.

The group guided for underlying EBITDA to come in between $350 million to $370 million in FY 2018, with capex excluding the ASC at $160 million to $170 million. Vocus also told investors to expect an additional $162 million in capex for the cable over H1 Fy 2019.

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Motley Fool contributor Tom Richardson owns shares of Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended 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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