Tag: Motley Fool Australia

If I were starting my investment journey again with my first $500 to invest into ASX shares, I’d pick Future Generation Investment Company Ltd (ASX: FGX).

The problem with investing just $500 is that brokerage can take up a material amount of your starting money. So I’d want to go for an ASX share that I could stay invested in for the long-term.

If you were to begin with a single ASX share like Commonwealth Bank of Australia (ASX: CBA) then your entire investment portfolio would be allocated to just one business. That’s not very good diversification. I’d also want to pick something that can do well if there’s another coronavirus market sell off. 

What if you could pick an investment that could give you good diversification right from the start? I think Future Generation is a good answer.

Why is Future Generation a good ASX share?

It’s a special listed investment company (LIC). The job of a LIC is to invest in other shares on your behalf. Most LICs will charge a management fee (and perhaps a performance fee).

But Future Generation doesn’t charge a management fee. It donates 1% of its net assets each year to youth charities.

What does Future Generation actually invest in? Well, it doesn’t invest in normal ASX shares. It invests in the funds of around 20 fund managers who also work for free. They don’t charge management fees or performance fees.

Each fund is a separate portfolio. So Future Generation’s underlying diversification is very strong. The investments that Future Generation’s managers usually go for are those smaller growth shares, so in normal times it may be able to offer better growth than the ASX index.

One of the fun things with LICs is that sometimes you can buy them for cheaper than their asset value. You can buy the ASX share’s $1 of assets for less than $1. That seems like good value to me. Future Generation has been trading at an attractive discount to its net tangible assets (NTA) in recent times. 

As a bonus, Future Generation currently has a grossed-up dividend yield of 7.3%. I think Future Generation is a good ASX share to start with $500.

More reading

• Got $50,000 to invest for income? Pick these 5 ASX dividend shares
• How to make $1,000 a month in dividends
• How to build good wealth with small investments
• Why high yield dividend shares can be detrimental to your wealth
• 2 ASX shares to build a diversified dividend portfolio

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The NextDC Ltd (ASX: NXT) share price has soared nearly 39% higher during 2020. This far exceeds the performance of the S&P/ASX 200 Index (ASX: XJO) which has fallen by 12% year to date.

Is this ASX 200 tech share overvalued right now? Or, is it a good long-term buy?

Fast growing cloud ecosystem

NextDC is Australia’s largest, locally-based data centre provider by quite a margin.

The ASX 200 company’s portfolio of data centres is home to one of Australia’s largest cloud centre partner ecosystems. This is highly advantageous because, in the data centre service market, ‘scale’ really matters. NextDC’s cloud centre community comprises more than 590 carriers, cloud providers and IT service providers.

Furthermore, the company is continuing to rapidly expand its portfolio of data centres, with a number currently under construction. NextDC recently completed a $672 million equity raising which will further assist with its expansion strategy.

The company is also looking at further data centre site acquisitions to expand its nationwide presence.

Continued strong growth during the pandemic

NextDC has benefitted from increased demand for cloud services during the coronavirus pandemic.

Under the government enforced lockdown measures, vast numbers of businesses have switched to a working-from-home model for their employees. Because of this, many consumers have increased their usage of bandwidth-hungry applications such as streaming video. This has been good news for the ASX 200 tech share.

Well positioned for long-term growth

NextDC has continued to grow strongly with the ongoing rise of cloud computing.  Over the last 4 years, the company’s customer base has grown at a compound annual growth rate (CAGR) of 21%.

This is very strong result for a data centre provider which typically grows at much slower rates than other IT companies such as Software-as-a-Service (SaaS) providers.

Interconnections have grown even more quickly for NextDC with a CAGR of 31% over the same period.

Customers are continuing to expand their ecosystems which is driving higher use of cloud services and connectivity with other data centres.

NextDC is also continuing to build newer and more energy-efficient Tier IV data centres. This is driving higher margins and higher recurring revenues for the business.

Is NextDC a solid, ASX 200 long-term buy?

The data centre game is highly capital intensive. There are high upfront costs to build new data centres. However, once in place, operators are well positioned to reap the benefits further down the track.

I believe that NextDC is well placed for strong revenue and profitability growth over the next 5 to 10 years. This will be driven by increased economies of scale and the rollout of more efficient tier IV data centres.

Despite the company’s recent share price rise, in my view, this still makes it a tech share worth buying and holding for the long term.

More reading

• Can ASX 200 retail shares outperform this year?
• JobMaker is coming. These 3 ASX 200 shares could benefit
• Why the Vocus share price can race ahead later this month
• Is the BHP share price cheap right now?
• Afterpay and these top ASX tech shares are on fire in 2020

Motley Fool contributor Phil Harpur owns shares of NEXTDC Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I think that the Vanguard Australian Shares Index ETF (ASX: VAS) share price is a buy.

At the moment the Vanguard Australian Shares Index ETF share price is down around 17.5% from the pre-coronavirus selloff high. That’s still a pretty large decline if you ignore where it was in March 2020. We don’t have a time machine to go back to that price.

All we can decide is whether today is a good time to buy or not to buy the exchange-traded fund (ETF).

Things are certainly looking up compared to a couple of months ago. The infection numbers are very low across the country and not as many people are on jobkeeper as feared.

Perhaps that means that the Australian economy won’t be as bad as expected? Let’s hope so.

In that context, I think it’s good to consider if the Australian share market is worth buying.

Is it time to buy Vanguard Australian Shares Index ETF?

At the moment the ASX banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are at low share prices. It’s a large reason why the Vanguard Australian Shares Index ETF share price is down as much as it is.

I’ve always said that I’m not a big fan of investing in banks. So being able to buy the ETF when the banks are a smaller allocation than before is attractive to me. I’d rather get more exposure to shares like CSL Limited (ASX: CSL), Macquarie Group Ltd (ASX: MQG) and Wesfarmers Ltd (ASX: WES).

As time goes on it’s growing shares like A2 Milk Company Ltd (ASX: A2M), Altium Limited (ASX: ALU), Aristocrat Leisure Limited (ASX: ALL), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) and Amcor Plc (ASX: AMC) that become a bigger part of the ETF.

We can’t decide how much each share makes up of the Vanguard Australian Shares Index ETF, we can just buy the whole ETF at today’s price. In the future the ETF may have shares like CSL, Wesfarmers and Xero Limited (ASX: XRO) at the very top of the holdings.

So, I think it could be a good idea to buy the ETF at a lower price, particularly as the Australian dollar is so strong right now. It means we can buy the earnings of shares that make earnings in US dollars, such as CSL, at a lower price in Australian dollars. I’d happily buy the Vanguard Australian Shares Index ETF today for the long-term.

More reading

• How to become a millionaire by investing in ASX shares
• 3 investing secrets for success with ASX shares
• I don’t normally buy ETFs, but I would buy these 2
• How teenagers can beat the share pros at investing
• How I would build a $100,000 ASX portfolio with ETFs

Tristan Harrison owns shares of Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Amcor Limited and Macquarie Group Limited. The Motley Fool Australia owns shares of A2 Milk, Altium, Wesfarmers Limited, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Zip Co Ltd (ASX: Z1P) share price has been a very strong performer again on Wednesday.

In morning trade the payments company jumped a further 30% to a record high of $6.74.

This means the Zip Co share price is now up a massive 81% over the last two trading days.

Why is the Zip Co share price up 81% in two days?

The catalyst for this strong gain was a major announcement by the buy now pay later (BNPL) provider on Tuesday.

That announcement reveals that Zip Co has entered into an agreement to acquire New York-based buy now pay later provider QuadPay. This deal will see the company go head to head with Afterpay Ltd (ASX: APT) in the United States market.

What is QuadPay?

QuadPay is a leading, high growth, instalment provider disrupting the credit card industry. It has a strong focus on innovation and customer centricity.

It has 1.5 million customers and 3,500 merchants on its platform. From these it is currently generating annualised total transaction value of over $900 million and annualised revenue of $70 million.

As with Afterpay, QuadPay splits purchases into four interest free repayments over a period of six weeks.

How is Zip Co funding the deal?

Zip Co intends to fund the deal through the issue of shares. If shareholders vote in favour of the acquisition at an upcoming extraordinary general meeting, the company will issue approximately 119 million Zip Co shares to QuadPay stockholders. This will represent the equivalent of 23.3% of the issued share capital of Zip at completion.

This implies an enterprise value of approximately US$269 million or A$403 million.

That won’t be the only thing shareholders are voting on. To support its expansion into a U.S. retail market estimated to be worth $5 trillion per year, the company intends to raise funds via the issue of convertible notes.

Zip Co has entered into an agreement with CVI Investments, Inc., an affiliate of Susquehanna International, to raise up to $200 million by way of the issue of convertible notes and the exercise of warrants. These convertible notes have an initial conversion price of $5.5328, which was a 47.7% premium to Friday’s close price.

Is it too late to invest?

I think this acquisition is a big positive for Zip Co and the U.S. market could be a key driver of growth for the company in the future.

However, although I’m a big fan of the company, I feel its shares are looking fully valued now after this strong gain. As such, I would class Zip Co as a hold until it starts to demonstrate that it can crack the U.S. market like Afterpay has.

More reading

• Afterpay and these top ASX tech shares are on fire in 2020
• ASX 200 rises 0.3%, Zip rockets higher
• These ASX shares were among the best performers in May, surpassing the ASX 200
• Zip Co share price rockets 44% higher on U.S. expansion news
• The 3 ASX tech stocks that helped this fund manager outperform in May

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Infigen Energy Ltd (ASX: IFN) share price is flying higher this morning in response to a takeover bid.

Infigen is a provider of renewable energy. The company generates renewable energy from its owned wind farms in New South Wales, South Australia and Western Australia. It also sources renewable energy from third-party renewable projects.

Infigen holds energy retailing licenses in the National Electricity Market regions of Queensland, NSW, ACT, Victoria and SA.

Why the Infigen Energy share price is going gangbusters

This morning, UAC Energy announced a takeover bid for Infigen Energy. UAC is an investment holding company owned by the AC Energy Group (a subsidiary of Ayala Corporation in the Philippines) and UPC Renewables Australia.

UAC intends to make an off-market takeover bid of 80 cents per Infigen stapled security. This offer represents a 35.59% premium to yesterday’s closing price of 59 cents and implies total equity value of $777 million.

UAC pointed out that the Infigen share price has not closed higher than 80 cents since August 2017. It believes the offer price is attractive and “presents compelling value in the context of the price performance of Infigen stapled securities”.

Commenting on the attractiveness of the offer more specifically, UAC said: “The Offer is particularly attractive in the context of recent falls in electricity prices as well as Infigen’s relatively high debt servicing costs, its limited track-record in paying distributions and decisions taken by Infigen to suspend investment in a number of projects and defer the delivery of its development pipeline.”

UAC also announced this morning it has acquired an aggregate interest in 12.82% of Infigen stapled securities. This consists of beneficial ownership of 9.9% and economic interest in a further 2.92% via a total return swap.

What now?

The offer will be subject to a number of conditions, including approval from the Foreign Investment Review Board. However, it will not be subject to a minimum acceptance condition.

UAC intends to provide a copy of the bidder’s statement to Infigen securityholders “in due course”. The statement will contain key information such as reasons to accept the offer and instructions on how to accept the offer.

Infigen is yet to release an announcement of its own regarding the takeover bid. At the time of writing, the Infigen share price has rocketed 35.59% higher to 80 cents, on par with UAC’s offer price of 80 cents.

More reading

• Can ASX 200 retail shares outperform this year?
• How I’d invest my first $500 into ASX shares
• 1 ASX 200 tech share to buy and hold for a decade
• Why I think the Vanguard Australian Shares Index ETF share price is a buy
• The Zip Co share price just zoomed to a record high: Is it too late to invest?

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Last week, Prime Minister Scott Morrison gave a 1-hour speech that outlined ways the government would work to create jobs within the Australian economy. This will be known as the JobMaker program and will include changes to industrial relations (IR) laws, along with skills and training.

The 3 S&P/ASX 200 Index (ASX: XJO) shares discussed below have seen a significant amount of their gains in recent years absorbed by higher wages. If new IR laws come into play that allow a reduction in these wage bills, these companies could potentially have the capacity to pay higher dividends to shareholders.

Telstra Corporation Ltd (ASX: TLS)

Telstra is Australia’s largest telecommunications company providing physical networks, hardware, mobile, voice and internet services. In the half year to December 2019, Telstra paid $2.17 billion in labour costs. That’s almost double its net profit of $1.15 billion.             

According to its annual report, Telstra has a highly skilled workforce of 29,769 full-time employees, many of whom are likely receiving pay rises every year. This can erode profits and is significant given that Telstra’s wages bill forms such a large amount of its expenses.

Last year, Telstra came close to a strike by some of its employees. It averted the action by offering better conditions and pay rises. Over the last year, Telstra paid dividends of 16 cents per share, fully franked. If the group sees reworked IR laws, it may have scope to reduce its labour bill and increase dividends.

BHP Group Ltd (ASX: BHP)            

BHP is an Australian-based global mining and energy giant. It has 72,000 employees, many of which are in Australia and work in highly skilled mining roles. Recent enterprise agreements proposed by BHP were struck down by the Fair Work Commission. If enterprise agreements that are more favourable for BHP are introduced and accepted due to reworked IR laws, it could see its wages bill reduced. This should lead to higher dividends.

In its latest annual report, BHP set out that it aims for no lost time due to industrial action. While this may help to keep production levels high, it also means that BHP may often be at the mercy of unions in negotiating collective agreements. Reworked IR laws will potentially make it easier for BHP to negotiate agreements with workers, with less fear of industrial action.

At the time of writing, BHP trades on a trailing dividend yield of 5.97% fully franked. This works out to about $6.2 billion in the last year. Payments to employees were $6.06 billion, therefore any reductions in wages could be favourable for shareholders.

Wesfarmers Ltd (ASX: WES)

Wesfarmers is an Australian conglomerate with interests in retail, coal mining, chemicals and fertilisers. It owns distinctive retail brands including Bunnings, Target, Kmart and Officeworks. Wesfarmers is one of the largest employers in Australia with 223,000 employees. Many of those employees are skilled and covered by collective agreements. These are the types of agreements the Prime Minister may be targeting, as they often include penalties and loading for weekend or overtime work. 

In 2019, Wesfarmers paid $4.14 billion in remuneration for continuing operations. This was a significant 5.67% increase on the prior year. Revenue on the other hand only increased 4.3% over the same period. Net profit after tax was $1.9 billion in 2019, less than half the amount paid out in wages.

Wesfarmers has a trailing dividend yield of 3.72% fully franked. If penalties and overtime are targeted as part of the JobMaker package, this could improve significantly. This is especially significant for Wesfarmers given the amount they pay out in wages each year.

Foolish takeaway

The details of the JobMaker program have not been released, however, investors could profit from getting in early. If the Prime Minister does change industrial relations laws in a way that is favourable for companies like these, it could mean a solid increase to dividends.

More reading

• Why the Vocus share price can race ahead later this month
• Is the BHP share price cheap right now?
• 5 things to watch on the ASX 200 on Wednesday
• This embattled ASX 200 company could be the next M&A target
• ASX 200 rises 0.3%, Zip rockets higher

Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re looking to add one or two small cap ASX shares to your portfolio in June, then I think the two listed below are worth considering.

Here’s why I think these small caps could be destined for big things in the future:

Bigtincan Holdings Ltd (ASX: BTH)

Bigtincan is a $276 million tech company which provides enterprise mobility software to businesses. This software help improve mobile worker productivity and has a track record of increasing sales win rates and reducing costs. Unsurprisingly, this has gone down well with businesses and a growing number of blue chips are using its software. This includes one of the big four banks, Australia and New Zealand Banking GrpLtd (ASX: ANZ).

Pleasingly, its strong growth has continued unabated during the pandemic. Management recently reaffirmed that it is on track to achieve its 30% to 40% organic revenue growth target in FY 2020, with stable retention. I think this makes it one of the best small cap ASX shares on the local market.

ELMO Software Ltd (ASX: ELO)

Another small cap ASX share which I think could grow strongly over the next decade is ELMO Software. It is a $560 million software company which provides businesses with a cloud-based human resources and payroll software solution. This unified solution is proving very popular with businesses that are wanting to streamline everyday processes such as payroll, recruitment, and learning.

ELMO recently completed a $70 million placement, with the proceeds being used to accelerate organic growth initiatives and to fund acquisition opportunities. I believe these funds could be used to expand internationally in the future as well. Not that it necessarily needs to. Management estimates that the ANZ market is worth $2.4 billion. This compares to its FY 2020 revenue guidance of $50 million to $52 million, which will be up 17.4% to 22% year on year. I think this makes ELMO a small cap to watch.

More reading

• ASX 200 rises 0.3%, Zip rockets higher
• ASX 200 down 0.1%: Big four banks drag ASX lower ahead of RBA meeting
• ANZ share price climbs higher on asset sale
• The big oil price recovery and bounce in ASX oil stocks are bringing out the bears
• How to value the big four ASX banks

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BIGTINCAN FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Elmo Software. The Motley Fool Australia owns shares of and has recommended Elmo Software. The Motley Fool Australia has recommended BIGTINCAN FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Yesterday, the Amaysim Australia Ltd (ASX: AYS) share price was making headlines after the company responded to media speculation regarding the potential sale of its energy business, causing shares to surge.

The Amaysim share price is charging higher again today but for a different reason. For some background, Amaysim is a subscription utility provider, delivering mobile and energy plans to customers around the country. The company launched in 2010 and is Australia’s fourth-largest mobile service provider.

What did Amaysim announce?

This morning, Amaysim announced it has signed a binding agreement to acquire ~77,000 mobile subscribers from mobile virtual network operator (MVNO) OVO Mobile.

OVO is the largest independently-owned, asset-light Australian MVNO, other than Amaysim. It uses the Optus network, like Amaysim, and offers pre-paid plans on a month-to-month basis without any lock-in contracts.

Amaysim expects the transaction to be completed “imminently” and for a maximum consideration of $15.8 million.

More than 74,000 of the acquired subscribers are recurring, thus accelerating one of Amaysim’s strategic initiatives to grow its recurring mobile subscriber base. This takes Amaysim’s recurring mobile subscriber base to 821,000 as at 31 May 2020, up from 726,000 as at 20 February 2020. Including the non-recurring subscribers acquired from OVO, Amaysim’s total mobile subscriber base was 1.17 million as at 31 May 2020.

For some more context, at 31 December 2019, Amaysim had 706,000 recurring mobile subscribers and 1.05 million total subscribers.

Amaysim expects to complete the migration of OVO subscribers in less than 4 months. The company has experience in this area after recently migrating around 42,000 Jeenee subscribers in less than 3 months. 

Amaysim expects the acquisition to be earnings accretive in FY21, with an increased earnings contribution in FY22 and beyond. It will be funded by a mixture of debt and cash reserves.

Guidance update

Along with the OVO acquisition, Amaysim also shed some light on its guidance for FY20. In spite of the challenges currently facing the economy, the company is pleased with the performance of the overall energy and mobile businesses in the second half of FY20.

On the energy front, Amaysim reported 209,000 energy subscribers as at 31 May 2020, up from 201,000 as at 31 December 2019.

The company confirmed it is on track to achieve full-year underlying EBITDA within the guidance range of $33 million to $39 million.

The Amaysim share price jumped 15.27% at the open and is currently sitting 18.06% higher at the time of writing at 42.5 cents per share.

More reading

• Why Amaysim, Bingo, Brickworks, & BlueScope are pushing higher today
• Amaysim share price flies 22% higher after confirming interest in its energy business

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Is the Westpac Banking Corp (ASX: WBC) share price a buy?

The Westpac share price has risen by 12.3% over the past two weeks. Not bad for a business that a lot of investors are counting out.

I suppose the market is simply saying that the Westpac’s troubles won’t be quite as bad as previously expected.

The Westpac share price is still down 40% compared to where it was before. That’s a large decline. There have been quite a few leadership changes within Westpac recently. Hopefully that’s a positive sign of renewal rather than anything else.

It’s not too surprising that the Westpac share price has dropped so hard. The recent Westpac FY20 half-year result outlined a number of the issues.

The statutory profit dropped 62% to $1.19 billion and cash earnings were down 70% to $993 million. When you exclude notable items, cash profit was still down 44%.

A significant part of the decline came about from higher impairment charges due to COVID-19. Westpac’s provisions for expected credit losses increased to $5.8 billion which included $1.6 billion of additional impairment charges predominately related to COVID-19 impacts.

Another problem that Westpac provisioned for is the upcoming AUSTRAC penalty. The bank has provisioned $900 million. Some don’t think that’s a big enough number.

What will cause the Westpac share price to rise further?

The recent news that not as many people are on jobkeeper as previously expected was positive. That’s a good sign for the overall economy and it hopefully means there would be less bad debts for the bank. That’s seemingly what caused the Westpac share price to rise over the past fortnight.

But beyond that, investors are waiting for more signs of a recovery for the banking sector. We’re still quite early into this crisis. Australia has been fortunate compared to most places in the world when it comes to the spread of the coronavirus. It will take a while for the full effect of the restrictions to be felt economically across the country.

The rest of the world is still going through the pandemic, so there could be more economic pain to wash through the global economy. Westpac will also have to come to terms with the very low interest rate which may harm the net interest margin (NIM) for some time.

How long will it take the Westpac share price to return to above $25? It could take a very long time. But if Australia’s banking system is safer than expected, there could be a bit more value at the current level. I’m not making that bet yet though.

More reading

• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 down 0.1%: Big four banks drag ASX lower ahead of RBA meeting
• How to value the big four ASX banks
• 5 things to watch on the ASX 200 on Tuesday
• I don’t normally buy ETFs, but I would buy these 2

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Its larger rivals have been stealing the spotlight from the Vocus Group Ltd (ASX: VOC) share price. But this may be about to change this month.

This is the prediction by Morgan Stanley, which is tipping a re-rating in the telecom services group’s share price when management provides an update in June.

If that comes to pass, it will be Vocus’ turn to have its 15 minutes in the sunshine. Investors are preoccupied with the merger of TPG Telecom Ltd (ASX: TPM) and Vodafone Australia, and the impact of that on the Telstra Corporation Ltd (ASX: TLS) share price.

Debt and earnings update

The cloud hanging over Vocus is the state of its balance sheet. Management is scheduled to provide an update on the refinancing of its $1.1 billion debt facility before the end of the month.

Morgan Stanley believes it will use the opportunity to update the market on its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) guidance too.

Vocus reiterated its FY20 EBITDA forecast of between $359 million and $379 million back in February at its half year results announcement. This compares to the average broker estimate of $367 million.

“For perspective, the last time VOC refinanced their debt, in Apr 2018, VOC shares rallied +21% over the next three weeks (vs. XJO +4%), as the risk of an equity raising was reduced,” said Morgan Stanley.

XJO refers to the S&P/ASX 200 Index (Index:^AXJO).

Best outcome

There are three potential outcomes from the upcoming Vocus update, according to the broker. Firstly, Vocus will successfully refinance its debt and reaffirm its EBITDA guidance.

This will lift market confidence in both its financial health and FY21 outlook with consensus pencilling in a $388 million figure.

Two other scenarios

The second scenario sees debt refinanced but the EBITDA guidance lowered by 2.5% to the midpoint of management’s guidance. This outcome will provide certainty on the group’s balance sheet but slightly weaken confidence in its FY21 outlook.

Under the third scenario, Vocus will launch a capital raising and downgrade its EBITDA guidance by 5%. This will see shareholders diluted and consensus downgrading forecasts for the next financial year.

Re-rating opportunity

The first scenario is the most bullish one and Morgan Stanley believes the stock will jump 13% from yesterday’s closing price of $3.10 to $3.50.

The broker believes this is the most likely outcome because management made good progress in turning the business around since the last refinancing exercise two years ago and there’s less earnings risk given this is the last month of FY20.

If there was bad earnings news, one would think the company would have already announced it due to the continuous disclosure obligation.

Worst case doesn’t look so bad

But even under scenario two, the impact on the Vocus share price may not be as bad as you’d think. The broker thinks the stock could also climb higher to $3.30 a share as that puts it on a price-earnings multiple of 18 times.

In the last and most bearish scenario, the stock is tipped to fall to $2.55.

However, I would point out that ASX companies that have undertaken a capital raise in the midst of this COVID-19 pandemic have outperformed after the raise.

So even if Vocus goes cap in hand to shareholders and the share price falls, this could also prove to be a buying opportunity.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited and TPG Telecom Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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