Australian Investment Blog

What Mattered Today

The ASX 200 closed marginally lower, with the banks unable to hold the broader market to hold in positive, while the materials and telcos were the weakest link

Today’s focus was squarely on the Telco space with Vocus (VOC) holding it’s AGM. The stock dropped sharply, closing down 26.48% to $4.35 – clearly a disappointing outcome for a company that has been under a lot of pressure in the last few months – and unfortunately, we own it in the Market Matters portfolio (+ I own it personally).

Before I get onto the intricacies of the update, the most pressing question is, what are we doing with our holding, and what should you do with yours? Firstly, we’ve clearly gotten this stock pick wrong and it’s been one of those holdings that just keeps delivering disappointments. Our thesis for continuing to hold the stock going into the AGM, was around ‘what had or hadn’t been priced into the market’ after the TPG Telecom (TPM) inspired fall from above $8.

To our way of thinking, the market had already priced in a negative update at the AGM, which left the door open for a positive surprise. The price action leading into the AGM was supporting that view, however as we’ve seen today, that clearly wasn’t the case. The selling today has been big and we’ve seen some large lines of stock being sold consistently throughout the session. Each time the stock tried to bounce, there was clearly a number of big sellers that kept offering up stock and we saw it close near enough to the lows.

Upon reflection and we’ve spoken about this in the last video update, we bought a stock that was too well owned and too well liked by the market. On the faintest sign of issues within the business, the selling volumes clearly outweighed any appetite to buy. Simply put, the majority were full to the brim with Vocus which left very few buyers.

We now have a stock that has capitulated, and some of the very bullish analysts at $8 and above, have now turned bearish – typically a sign to BUY a stock given the consensus is now clearly negative. If we had no position, or indeed a smaller position in Vocus, we would be buyers of this ‘capitulation’ event, or even allocate some funds into TPG Telecom (TPM) which has been sold down in sympathy.

Now to the numbers; VOC have given FY17 earnings guidance of $430m-$450m which is ~7% below where consensus expectations were at. The stock was trading on a PE of ~15x FY 17 consensus numbers, and we’ll now likely see analysts price it on a lower multiple, and on lower earnings and that’s why we’ve seen such a drop in share price.

The corporate business, which is the jewel in the crown continues to do well, yet they are clearly having some issues with the integration of their 5+ recent acquisitions.

Before this update, the market was expecting earnings growth of 17% in 2018 – which was clearly a bullish stance, but took into consideration recent acquisitions, we’ll now likely see expectations for growth in the low teens – which, if they can deliver, still looks appealing.

For now, we’re maintaining our holding and for those subscribers with a high risk tolerance, averaging in at / around current levels makes sense to us. Conversely, those with an especially large holding, could trim Vocus to reduce the ‘stock specific risk’ and re-allocate some of the funds into TPM which has been sold down in sympathy.

On the market today, we had a range today of +/- 33 points, a high of 5,487, a low of 5,453 and close of 5,457 down 7 points or -0.13%.

ASX 200 Intra-Day Chart

ASX 200 Daily chart

Vocus Communications (VOC) Daily Chart

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