Interesting times for Aussie telco sector
Morningstar's Brian Han explains why corporate player Vocus faces a hard road ahead, and what a potential TPG-Vodafone merger could mean for the sector.
Brian Han: So, the first thing to note about Vocus' results is that it was pretty much within expectations. And that's not saying much, because over the past 12 months Vocus has posted greater earnings, several times. So, to meet that lowered guidance wasn't much of a feat.
What is important is that this result was not generated under the watch of the current CEO who was only appointed a couple of months ago. And what this CEO has done is, he recognised the execution hiccups that Vocus has suffered over the past 12 months and he is trying to reset the focus of the Group.
And we liked what we heard, and we do believe, we do agree with him that there is significant growth potential ahead of Vocus, but there is a hard road ahead in terms of integrating all their recent acquisitions and actually executing on that growth strategy. But we do believe the shares are a little undervalued and we value it at $2.90 per share.
In terms of the implication of the potential TPG Telecom-Vodafone merger, the first thing to say is that it is still just talks at the moment and we don't know who is actually taking over who and who will be running the combined entity if the merger does in fact happen.
What we can say is this; firstly, this has positive industry implications. Essentially, if they do merge, instead of having a new fourth player in the mobile telecommunications industry, you are going to remain a three-player market which means that mobile profit pool of the industry will continue to be shared between three players instead of four. And that has very positive implications for Telstra, whose shares have been under pressure over the past 12 months because of this fear that TPG, as a fourth mobile player, will eat into the margins of everybody else or the incumbents in the industry.