Investor concerns regarding the debt position of Vocus Group ((VOC)) have been put to rest and it is now clear an equity raising is no longer required, lifting the overhang on the share price. However, there remains some uncertainty in terms of the economic outlook over FY21.
Vocus Group has refinanced its syndicated debt facilities and extended the size to $1.26bn, with a weighted average term of 3.5 years, extended from 1.5 years. The New Zealand facility of NZ$135m is unchanged.
Restrictions on net debt ratios have also been eased slightly. Morgans understands this does not translate to higher first half FY21 capital expenditure or debt levels but should provide a margin of safety. The broker assumes the cost of debt increases by around 50 basis points and also forecasts a higher debt balance because of the lowering of free cash flow forecasts.
Refinancing has taken the pressure off the balance sheet and also removes fears that Vocus Group would not be able to access debt markets. The improved leverage should be more than sufficient to ensure covenants are not breached, Credit Suisse asserts.
Brokers also welcome the renewal of FY20 operating earnings (EBITDA) guidance, which has been tightened to $359-369m, at the lower end of the former range. This is a little weaker than Credit Suisse expected with the variation to estimates likely to reside in the retail segment.
Ord Minnett assumes the network segment grows organically by 8%, supported by the increased usage of the Australia-Singapore cable and wholesale network from technology customers, as well as the requirements by wholesale customers for more backhaul to service higher network demand.
The fact management was able to broadly reiterate guidance is a welcome development Morgans believes, and there is now a margin of safety should economic activity weaken and customers’ ability to pay bills deteriorate over the rest of 2020.
Risks
Counterparty risk still exists with respect to small/medium enterprises (SMEs). With current government stimulus packages to last until mid-September, most SMEs are a going concern, but if the economy has not adequately recovered towards the end of 2020, and there is no longer any government support, the broker warns the situation could deteriorate.
Credit Suisse agrees, and envisages scope for weakness at Commander in particular as SMEs are likely to be scaling down to necessities, albeit unlikely to disconnect services while stimulus measures are in place.
Morgans reduces revenue growth forecasts and also capital expenditure estimates, as less investment will be required to fund growth. The main swing factor is the economic recovery in terms of forecasts for the next year.
Moreover, it takes time to deliver a unified fixed line communications business out of the many acquisitions the company has undertaken. To date, Morgans assesses investors appear to be pre-empting a strong recovery in earnings.
Yet, this could be some years away and the pandemic may slow a recovery down further. Still, the broker is comforted by the fact that new management has articulated a turnaround plan that should not descend into shortcuts for quick gains.
Morgans would prefer that the operating cash flow is reinvested to de-gear the balance sheet and points out free cash flow generated over the next few years, given the current profile, will go straight to the banks, not to investors.
Still, the broker assesses that this is “the right thing to do”. FNArena’s database has two Buy ratings and four Hold for Vocus Group. The consensus target is $3.57, signalling 13.1% upside to the last share price.
