Assessment of all the action so far
So a lot of people have been confused by the continuous decline in VOC share price. I have done some fairly decent research and would like to share my insights.
Vocus acquired Nextgen in 2016 which the market was not supportive of. The market viewed the acquisition as an overpaid investment which increased capex and debt. Thus, squeezing profit margins.
Now pre-nextgen people were buying into Vocus due to growth potential. They believed it had a good fibre network (not as good as TPG) and were looking to establish the submarine cable that linked Australia to Asia (which funds believed would provide a differentiating factor for vocus compared to competitors). However, competitors are now muscling into this space. Vocus will not have a differentiating factor compared to competitors and investors see this as a negative. Whilst all of this was being figured out and projected, speculative short funds began shorting vocus during Nov 2016. This was on the back of next-gen and pessimistic earnings announcements. The hedge funds managed short average price around $6 so when the stock dipped to $4 they had some hefty profit marin (33% approx.) This then allowed them to find a hedging position. Now these fund managers would had known about TPG looking to acquire spectrum. What does this mean? Well this is big ***king news. Spectrum allows a telco to operate its own mobile network and not piggy back off other suppliers ie Telstra, Optus or Voda and pay them to use their networks. Why would they do that. Here’s the play. If TPG won the spectrum auction, they would be able to supply their own network. They have the most extensive amount of fibre in Australia. This synergises ridiculously… WHY? Well fibre produces insane speeds as some people know, and TPG plans to allow data to travel through cell phone towers ON THEIR OWN SPECTRUM and then fly crazy fast via their own fibre network. People will have insane speeds wherever they go (metro areas). To me, this is TPG's long term play.
If you go to the below link, you can see the perfect negative correlation between short percentage increasing from 5% to 11% and share price decline.
http://www.shortman.com.au/stock?q=voc
Long Short Strategy
How does this work? Here’s the big play. The instos/funds went SHORT on VOC and LONG on TPG. WHY? Well the insto/funds believed that VOC would become less attractive due to its diminishing competitiveness and were hoping that TPG would get the spectrum. They go short on VOC and long on TPG. Now they are completely hedged (cancelling downside risk out). They already have profits from the drop from $6 to $4 for vocus and if it went the other way, they would still make some profict if VOC went up and TPG down. However, the opposite has occurred. They managed to make a hefty gain. Furthermore, I think other insto/funds started to realise that VOC offered nothing besides reselling NBN so they started to bail in the past week (hence the large volume).
I’d also like to debunk a couple common phrases being thrown around:
“Vocus has strong fundamentals and good multiples”
Fact: multiples can be misleading. Vocus was perceived as a ‘Growth’ stock. This means it was operating at multiples above industry due to expectations it would continue the good run of beating earnings. However this all began to change in 2015 as per below:
Surprise FY EPS Surprise %
In Line FY16 0.0%
Negative FY15 -6.1%
Positive FY14 2.6%
Positive FY13 7.7%
Now that earnings deteriorated, the multiples began to fall back in line with expectations. People were buying into Vocus thinking it will rebound over the medium to long term. However, to prevent market sentiment the stock needs to have a good earnings announcement. If the stock has anything besides a surprise it won’t be going back up for some time.
"Vocus is building the submarine cable to Asia"
Fact: competitors are moving in and this provides no edge for vocus. Vocus does not have a competitive advantage.
"Vocus mainly focuses on corporate customers"
Fact: True, but they will have limited growth in the retail space (hence latest downgrades in earnings) and have no competitive advantage to other corporate suppliers on fibre since the cable will be supplied by others.
I believe the shorters will stay until the FY17 announcements. They have nothing to lose waiting till then and will continue to pressure the stock down.
