Overview: Vocus Communications (“Vocus”, ‘the Company”) supplies telecommunications and data centre services to Internet Service Providers (ISPs) in Australia and New Zealand. The Company owns domestic fibre and data centre infrastructure whilst sub leasing international transmission capacity to Singapore and the US. We initiated coverage in April with a ‘buy’ recommendation at $2.10/sh.
Catalysts: Customer base expansion for the past 16 consecutive quarters has driven average compound revenue and EBITDA growth of 50 percent pa for the last three years. Concurrent reduction in capital spending and improved capacity utilisation is expected to
Hurdles: Amid recent capacity investments the Company’s balance sheet is fully geared (net debt 3x EBITDA). The rollout of the National Broadband Network (NBN) could adversely impact the competitive landscape.
Investment View: Delivery of the NBN is expected to reduce competitive barriers for ISP’s, increasing market opportunities for Vocus. Independent of the NBN’s final architecture, data demand should continue booming. With significant capacity at hand, we expect Vocus’s strategic wholesale investments to yield increasing returns amid these drivers. Impressed with current earnings momentum, we maintain our ‘buy’ recommendation and upgrade our 12-month target price to $3.40/sh.
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