Investment Matters

What matters this week: Vocus sinks. NAB okay. ANZ poor.

Bank profit announcements (ANZ & NAB) were important.  But telecom company Vocus took the headlines with its 30% fall this week, taking it down 70% since 30-Jun-16. 


The telecommunications company Vocus has been the story of the week on the markets.  It issued another downgrade this week, for FY-17 earnings of between $160m and $165m.  This follows disappointing the market last October with a then forecast of between $205m to $215m. 

The company has been on an acquisition binge over the last two years, including Nextgen Networks (Oct-16: $860.7m including $54m deferred), Amcom (Jun-16: $1.2b SoA merger) and M2 Group and (Feb-16: $3.75b SoA merger).  It is clear that the expected earnings from these acquisitions have not lived up to the company's or shareholders' expectations.

The downgraded result means that EPS for shareholders goes from 29.92 cents in FY-16 (based on underlying profit), to 26.08 cents in FY-17 (using current shares on issue and earnings estimate midpoint).   The EPS goes down because of the considerable number of additional shares on issues - shares issued to fund a capital raising for the Nextgen acquisition, as well as the additional M2 and Amcom shares.  This further emphasises that the acquisitions have not met expectations, and in fact to date have been detrimental to shareholders.

Although the company has indicated it is operating within its debt covenants, there is media speculation in the market that there is a problem.  Any when it comes to debt concerns, the market has an uncanny way of often being right.



The other main news of the week was the release of half year reports for two of the four big banks.  CBA reports to a 30-Jun financial year, and Westpac releases its results on Monday.  Overall NAB was pretty good, and ANZ disappointed. 

The key metric we looked at was bad debts/ non-performing loans, as this gives an indication as to the risk trend as well as as more macro view of the economy's health.   There was some signs of a moderate decline, for example ANZ's >90d past due home loans increased 8% vs one year earlier, and similarly NAB's total 90+ days past due loans to gross loans and acceptances increased to 0.41%, from 0.37% one year earlier. 

However, impaired loans as a percentage of total loan assets remains very low for both banks, and at risk should economic conditions deteriorate and / or residential and commercial property come under pressure.