from http://www.psl.com.au/research/your-market-daily#VOCVocus...

from http://www.psl.com.au/research/your-market-daily#VOC

Vocus Communications Limited (VOC)

Back in Vocus

With VOC's share price having pulled back circa 12.0% since our last report (early May) we believe value is now inherent and upgrade our recommendation to a BUY. As a wholesale provider of 3 key telecoms products - international internet connectivity, data centre services and dark fibre networks - VOC is well placed to capitalise on continued growth in internet traffic and data volumes, the increasing trend of outsourcing IT requirements and the developing cloud computing market. Our price target is unchanged at $2.80 and implies a 19.1% 12 month total return.

* Highly scalable business leveraged to internet demand. Australian internet traffic (volume of data downloaded) increased 49.9% over CY10. A large proportion of VOC's earnings are leveraged to this dynamic where growth is expected to continue into the medium term. For example, Cisco Systems forecast Asia Pacific internet traffic to increase by a CAGR of 35.0% through to 2014.
* Digital River Networks (DRN) acquisition explained. While the recent acquisition of 59km of dark fibre from DRN won't be earnings accretive until 2H11, we believe it is a logical strategic move by VOC. Put simply, dark fibre is the leasing of fibre optic cables to provide redundancy in-case of network failure as well as the option for future use. We believe the cost to build a network with similar key CBD locations (such as Collins St in Melbourne) would be much greater than the $3.95m acquisition price, let alone considering the time delay to get approval and perform the build. We understand VOC will look to roll out additional fibre on the back of new customer agreements.
* Dark Fibre to become a key offering? Dark fibre is becoming an increasingly relevant product for ISP's and corporate entities ahead of a progressing trend to IT outsourcing and cloud computing. DRN operates a business model similar to that of Amcom (ASX: AMM) and PIPE (ASX: TPM), albeit on a much smaller scale. We believe dark fibre is a key growth driver for these businesses and see VOC's recent expansion into this market as a logical strategic move.

Disclosure: Patersons Securities Ltd acted as Underwriter to a Share Purchase Plan that raised $1.9m at $2.00 per share for Vocus Communications Ltd in April 2011. Additionally, Patersons Securities Ltd acted as Lead Manager to the Share Placement that raised $13.1m at $2.00 per share for Vocus Communications Ltd in March 2011.