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Why I think Vocus Group Ltd (ASX:VOC) is the best telco for long-term growth

For shareholders in any of Australia’s major telecommunications companies, 2018 had been shaping up to be another poor year. But the August announcement of a proposed merger of equals between TPG Telecom Ltd (ASX:TPM) and Vodafone Australia has re-energised the industry.

Telstra Corporation Ltd (ASX:TLS) has enjoyed a welcome bump in its share price after years of poor performance, up a little over 6% from its mid-August price of $2.858. And TPG Telecom has surged over 35% since media speculation of the merger first started gathering steam. But the real winner has been Vocus Group Ltd (ASX:VOC), which has seen its share price skyrocket almost 50% over the same timeframe.

So what has given Vocus such strong tailwinds?

Around the time of the proposed merger announcement, Vocus released its full year results in which the company reported that it had met its revenue and earnings guidance. Reported revenues were $1.9 billion, up 4% year-on-year, while underlying EBITDA rose 7% to $360 million. Underlying NPAT for the year declined 17% to $127 million, but this actually represented a strong turnaround after a disappointing first half when Vocus had reported NPAT of just $37.3 million.

This means that Vocus delivered significantly better performance in the second half of FY18, giving investors some faith that this momentum could continue to build into FY19 and beyond. Vocus was also able to do this during a time of significant internal upheaval and transition, after both its CEO and chairman exited the company.

The market seems to have responded positively to the new leadership at Vocus and their strategy for longer-term growth. The company plans to leverage its extensive fibre and network infrastructure assets with the goal of doubling its revenues from its enterprise, government and wholesale businesses in Australia and New Zealand within the next 5 years.

For FY18, combined revenues across these business segments were $569 million – but the company admits that its market share relative to its assets is still very low and it has plenty of room left to grow. Its focus for FY19 is on building customer numbers by increasing its investment in sales resources, particularly in the more populous states of Victoria and NSW. It has also separated its underperforming “Commander” business out from the rest of its Small Business segment in order to devote additional resources towards turning it around.

Vocus has also achieved some other key milestones worth getting excited about. In September, Vocus operationalised its 4,600km long Australian Singapore Cable which it completed construction on in June. This gives the company a unique opportunity to expand its international footprint and meet data demand from customers across South Asia.

Most likely due to the success of its Singapore project, Vocus was also recently awarded a contract by the Australian Government to construct a similar underwater cable linking Australia with the Solomon Islands and Papua New Guinea. The company expects to deliver this new Coral Sea Cable project during FY19.

Foolish takeaway:

This year could easily have been another underwhelming one for Vocus, continuing a general decline across the telecommunications sector. And after hearing that key leadership figures had left the company earlier this year, you could have been forgiven for thinking they were fleeing a sinking ship.

But the new leadership team seems energised and excited about the company’s ample growth opportunities. Vocus has shown a real desire to invest in new infrastructure projects while at the same time better commercialising its existing assets. This means that Vocus feels leaner and more agile, even while it expands its presence internationally. It also allows the company to differentiate itself more easily from the other major telcos, through its focus on wholesale, government and corporate clients.

As a shareholder in Vocus, I’m impressed by the company’s recent results and believe it is positioning itself nicely for future growth.

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Motley Fool contributor Rhys Brock owns shares in Vocus Group Ltd (ASX:VOC) and TPG Telecom Ltd (ASX:TPM)

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