Investors have been rallying behind telecommunications provider Vocus Group Ltd (ASX: VOC) in the lead up to the upcoming 5G auction war as we all watch and wait to see how things will play out between sector stalwart Telstra Corporation Ltd (ASX: TLS) and disruptor TPG Telecom Ltd (ASX: TPM).
TPG is tipped to be heavily focused on increasing its margin in the mobile market while Telstra mops up from the NBN rollout. Telstra shares are seeing a welcome resurgence in price in the past few weeks – recovering from a multi-year low of $2.62 back in June to $3.19 at the time of writing.
Telco investors have been stalking Telstra off the back of the proposed merger between TPG and Vodafone Australia while Vocus is in the background with a share price hovering around 52-week highs.
Vocus shares were up 1.2% to $3.26 at the time of writing – not far off its January 2018 peak of $3.32 and well up from its price point of $2.37 at this time last year.
So what’s going on at Vocus HQ and is it too late to buy in?
Not according to Citi analysts, who lifted their price target on Vocus shares to $3.65 last week and maintained a buy rating on the stock.
Vocus handed down its annual report today, listing its performance highlights as its NBN market share growth from 8.2% to 8.9%, its underlying EBITDA rising 7% to $366 million and its contract win for the Coral Sea Cable project build.
Earlier this month Vocus announced a collaboration with the Northern Territory Government to service the outlying areas of the Solomon Islands and improve the connectivity of Papua New Guinea, which Vocus believes will cement its footprint as a formidable player in the global digital economy.
But investors disappointed that Vocus did not declare an FY18 dividend are no doubt hoping for its reinstatement in FY19, with Vocus certainly appearing to have solid growth in its pipeline, albeit with a hefty level of debt.
For Vocus, there is competing demand for capital investment across its business, and the company will need to get the formula right to ensure earnings growth comes through while they have so much going on.
Overall, Vocus needs to position itself as an attractive telco investment option in a sector in the midst of a period of transformation.
While I think Vocus has some strong growth on the horizon, I think it would be prudent to hold fire for the time being if you’re seeking a buy-in, not just because its share price is close to 52-week highs, but because the sector itself is so volatile at present and could be for another 6 to 12 months depending on how things play out with Telstra, TPG and Vodafone Australia.
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Motley Fool contributor Carin Pickworth owns shares of Telstra 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.