Vocus Communications Limited (ASX: VOC) has pulled the annoying stunt of releasing its results 15 minutes before the market opened. I've had a quick look at the report, and decided to add the company to the Hypothetical Ethical Share Portfolio at the last traded price of $3.52 (at the time of writing). [Edit: buy price will be $3.70 or closing price today... see comments below]. [2nd Edit: whoops I added it at $3.77 instead]

I regret not adding Vocus to the Hypothetical Portfolio at $3.10, where it traded just weeks ago. This is especially true because I bought shares in my own portfolio at those prices. That's life I guess.

I don't have time to write up the report (indeed, I've only scanned the numbers myself). However, the thesis expressed in this stock research on Vocus Communications holds. In fact, due to the growth in fibre revenues, I'd say that the moat is widening.

Here are my notes on the half yearly. The numbers are approximate, and the comparisons are with the immediately prior period (2H 2013). I don't believe the company is notably cyclical, so I don't care for prior corresponding period comparisons.

Vocus 1H 2014

Fibre and Ethernet Revenue growth of over 40% from $9.5 million to $13.2 million - slightly exceeds expectation

Data Centre from $8 million to $9.2 million growth of about 15% - meets expectations

Voice from $4.5 million to $3.8 million: contraction of 15% - under performs expectations

Internet from $14.5 million to $17.8 million growth of 22% - really exceeds expectations

Other observations: Capital Expenditure higher than expected. Depreciation and Administration were significant($9 million together) - capable of explaining the deficit between profit and cashflow. Cashflow up strongly for the half, to $13 million.

While depreciation and amortisation is real, I believe that much of the network equipment will outlast its depreciation period of 5 -30 years. Also, the Voice segment is the least important segment, so if any area can under-perform without breaking the thesis, then that's it.

The Author owns shares in Vocus Communications. Nothing on this website is advice, ever. The purpose of this blog is to keep track of my decisions and invite feedback

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Dean  10 years, 2 months ago Reply
10 years, 2 months ago Reply

Hi Claude
Thanks for the good write-up.

I'm not sure of your aim with the ethical portfolio but if you want to establish an indisputable track record then adding shares at the last traded after a good half yearly report and prior to open leaves you open to criticism.

And Claude if you're gonna regret anything to do with Vocus, you should regret not adding it at around $1.70 when I reced it Motley Fool ;)

Again thanks - D

Claude Walker  10 years, 2 months ago Reply
10 years, 2 months ago Reply

Thanks for this Dean, good point.

I will amend the buy price to closing price today assuming, it is not above $3.70. I think this is fair, because it has traded plenty below $3.70 this morning. [Edit: I actually added it at $3.77 in the end]. The point of the Hypothetical Ethical Portfolio is to prove that one can achieve market beating returns while being a socially and environmentally conscious investor. Also, I hadn't started the Hypothetical Ethical Portfolio when you recommended Vocus. However, I did add it to my portfolio at that time (at $1.80). And then again at $2.30, and then again at $3.10. So thank you; yet another Morel call that has proved extremely apt.

Antony J  10 years, 2 months ago Reply

I'm curious why you are adding the company now to the portfolio? ROE has steadily declined from 88 in 2009 to just 9 in 2013. This suggests to me that the quality of the business has slumped. With the current price tag it's priced for absolute perfection. At $3.70, I'd be inclined to be on the short side with this one.

Claude Walker  10 years, 2 months ago Reply
10 years, 2 months ago Reply

It was an impulsive decision. The Hypothetical Ethical Portfolio is just that, and is therefore an experiment of mine. As such, I'm trying to buy companies that will continue reliably spinning off cash in almost any likely circumstances.

Grant  10 years, 2 months ago Reply

Antony, I agree that Vocus is priced for some very favourable numbers to come in over the next 10 years.

I don't agree that the business has slumped and I certainly would not be short.

This is a complicated business to understand and value. The return on equity has been affected by massive FX losses. There are also some other adjustments which need to be made to get a true indication of the companies underlying earning power.

Additionally, the IRU agreement complicates the balance sheet.

Thanks for the article Claude, your explanation of the business model regarding the dark fibre and data centre revenue to complement and eventually replace the IRU based revenue was great.


Claude Walker  10 years, 2 months ago Reply
10 years, 2 months ago Reply

Thanks Grant,

Kind of you to say. I also appreciate you helping out Antony on here, as my reply wasn't really very informative. It goes without saying that I think shorting Vocus would be a high risk low return strategy.

I had literally 20min to read that report, so of course it was not based on in depth analysis. It was simply based on plugging in the numbers and comparing the actual results with my expectations. As you point out, the better research is the article I wrote some time back, which is still useful. I literally looked at the report, re-read my research and then made the decision it was still reasonably attractively priced.

Having looked at it a bit more closely, I'd say the results were positive, but also that the recent run-up to $4.60 marks the end of a period where Vocus was frequently available at an attractive price, and the beginning of a period where there may be opportunities for long-term holders to exit the investment should the company become over-hyped.


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