To reiterate, the basic issue in contention is whether one should be deducting all capex from cashflow to derive FCF or whether one should attempt to split out maintenance versus growth capex.
Before proceeding, I need to address two comments, which in my opinion, with due respect, is misguided. Firstly, there was comment that distinguishing maintenance versus growth capex is a false dichotomy. I am flatly in dispute on this, at least on a conceptual basis. It might be difficult to do so, but degree of difficulty does not negate the vital distinction required to establish true owner's earnings. In VOC, it may not even be that difficult, given that they have the contracts signed before spending. Perhaps simplistically, growth capex is whatever spending required to connect new customers.
Secondly, there was comment that the CEO has clearly stated the free cashflow of VOC for 2014. That is pure bollocks- Spencely was talking about money leftover after all capex spent which could be distributed as dividends. In his mind, money spent on growth capex is not money available to him to pay dividends, given that the contracts were signed and VOC is contractually obliged to spend on capex to connect new customers. He was not referring to FCF/owner's earnings from a valuation viewpoint.
I have attempted some crude estimations using both versions of FCF as defined/debated. If one is to subtract full capex inclusive of growth capex, then 2014 cashflow is zero, however, we could estimate 2015 cashflow given the various guidance and comments made to date by VOC. The valuation range using both version of FCF, surprisingly, do not really differ significantly. The range of values thrown up are also pretty interesting, and provides further insights.
Finally, it appears that ROE/ROA figures provided by Etrade et all are inaccurate, as they invariably calculate ROE as NPAT/Closing Equity. If one looks at the figures provided, the ROE and ROA are dismal, somewhere around 8%.
I submit that it is more accurate to calculate ROE as NPAT/Opening Equity or NPAT/Average Equity. Even better is to use Owner's Earnings or Cashflow divided by Opening/Average Equity. In any case, readjusted ROE figures landed into the respectable mid-teens. Why is this important? Well, it shows, in a rather crude manner, that capital invested/reinvested is getting a decent return.
VOC Price at posting:
$5.25 Sentiment: Hold Disclosure: Held
