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Stars of the data world

Media Room, On the Internet | Comments (60)

Stars of the data world

Unlike a conventional “Blue Chip” portfolio founded on the principles of diversification in large well-known companies, Roger Montgomery’s Money Value.able portfolio is driven by the pursuit of extraordinary businesses at prices less than they’re worth. In the April 2011 column, Roger diverges slightly from his ‘picks and shovels’ theme to focus on a company that is reaping the benefits of Australia’s exploding internet usage. Read Roger’s article.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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60 Comments

  2. Julie T
    :

    Would be interested to know why management selling shares in VOC recently. Chairman sold between 12-18 April – around 205,000 shares at prices ranging from $2.68-$2.88 – about 43% of his ordinary shares (ex options)???

    • Ash Little
      :

      Hi Julie,

      I am just guessing but options are erercisable in June so we will see so if they were sold to co-inside with that

  3. Greg
    :

    Hi Roger,

    What I don’t get is why VOC can have a competitive advantage.
    Vocus simply rent a small chunk of capacity in a undersea cable (SCCN) own by TEL (50%) & SGT (40%).
    Currently SCCN capacity is 620Gb with max capacity 3.6Tb [http://www.southerncrosscables.com/public/AboutUs/default.cfm] which is 17% usage, or 83% of potential capacity up their sleeve. Another way of looking at it is there is 500% potential growth once current unsold capacity is sold.
    If resellers like VOC have large margins then the owners must have even larger margins.
    If the data demand is going to grow at exponential rates doesn’t VOC’s capacity max out soon, and 100% of the advantages of incremental capacity increases go to the cable owners?.

    This is like the current Aust wireline telecommunication industry (pre NBN), every body’s network is built on top of Telstra’s network. If they do well, Telstra does better.

    There are plenty of other cables linking Aust to the world. TPG just bought Pipe Networks for a song to get their hands on the PPC1 Sydney to Guam 2.56Tb cable. Guam is USA territory with plenty of other cables from Asia to mainland USA transiting Guam. That’s why Pipe terminated at Guam – no need to go any further.

    SCCN was built in the heady days of the tech boom when an incumbent New Zealand Telecom wanted to play in the deep end of the swimming pool. Optus came in with equity to keep the cable project afloat (pun intended).

    I don’t see VOC advantage, unless they have right to a percentage of ALL future SCCN capacity at an already agreed price AND there is NO price competition from other cable owners/resellers.

    Regards Greg

    • Roger Montgomery
      :

      Hi Greg,

      Not sure I agree with your statement “If resellers like VOC have large margins then the owners must have even larger margins.”
      Infrastructure investors are delighted to achieve CPI plus a few percent. but what their margin is less relevant to VOC unless it adversely impacts on VOC’s margins. Happily its a US dollar contract at US interest rates. And I am delighted it is and happy to include currency gains as profit.
      One source of competitive advantage can be people. The vendor of PIPE is on the board at VOC, as is former Ozemail CEO and MD David Spence.
      And a company that has a business that can be 5 times bigger is not unappealing. You have also left out the song they are getting data centres for…
      But no matter, a difference of opinion is at the heart of the market and is the reason we have liquidity.

      • Greg
        :

        Hi Roger,

        I was a Pipe share holder and personally thought the directors sold too cheaply. I hope VOC directors do better for their shareholders.

        Telstra had (has) huge market share but was bleeding customers to competitors each month. They had (have) a dilemma, cut margins and keep customers, or keep margins high and slowly lose customers. When the leak turned to a flood of customers, Thodey recently decided to stem the flow and reduce margins ($1b hit).
        I see a similar situation with SCCN, if VOC start taking market share the cable owner just has to lower prices to catch the extra traffic.

        None of the above considers that there are plenty of other cables out of Aust [http://en.wikipedia.org/wiki/List_of_international_submarine_communications_cables]:AIS, AJC, ANZCAN, APCN, APNG, APNG-2, Gondwana-1, JASURAUS, PacRimWest, PPC-1(Pipe), TASMAN 2. Some of these cables are old and full, but they add to over all capacity. As soon as the cost of bandwidth increases above cost of a new cable (costs are coming down all the time), someone will build a new one, with a lead time of only a couple of years.

        If someone like maybe, NBN (who plan to build a fibre network to 93% of Australian homes, a wireless network for 4% and fly two purpose built satellites for the remain 3% – each of these is a duplication of existing infrastructure!!!) announces they are going to build their own cable(S), then market dynamics may change suddenly.

        Regards Greg

  4. Mark H
    :

    Hi Guys,

    You’re right – took at look at the balance sheets and was nearly sick, well started laughing…not the healthy shine I was hoping to see…

    I read somewhere that ths terrible weather may be excellent for cotton growing (dams full & the soil full of moisture etc) which with a top down effect – commodities thru the roof, will be beneficial.

    Verdict is my wallet’s remaining closed, which is bad news for the moths who are awaiting their escape…

  5. mark H
    :

    Oops, VOC EPS = $0.07 of course at half year…

    Off topic, Has anyone researched soft commodity stocks on the bet that there’ll be further increased growth over the next few years?

    I’m going to look at:
    1. Tandou (ASX: TAN) – cotton & sheep
    2. Primeag (ASX: PAG) – wheat & copper

    to see if there’s any value/assess prospects etc.

    Others have also mentioned graincorp (ASX: GNC) on here too.

    Be interested in others thoughts on these.

    Cheers,
    Mark H

    • Ash Little
      :

      Hi Mark,

      I have been looking for a soft commodity play for awhile. It is such a shame that IPL overpaid for their acquisition in 2007.

      I have not looked at TAN but will do so now.

      In my view view PAG overpaid for their acquistions and some of them are probably not at market length.

      Just my view

    • Ron shamgar
      :

      Hi mark,

      I can pretty much guarantee u will be highly disappointed!!

      Farming, unfortunately, is not a great business….

      • Ash Little
        :

        Hi Ron

        Like all businesses.Their are good and bad farms and farmers.

        The returns might be inconsistent but avaerged over time they can be spectacular for some and totally dismal for others.

        My personal view is that the good farmers will make very very good profits in the coming years.

  6. mark_hol
    :

    Hi Michael,

    Re: Forecast EPS for VOC, I couldn’t find anything on Commsec or Reuters, but Yahoo Finance has EPS for 2012 at $0.15, up from $0.13 this year (basic EPS was $0.714 @31 Dec ’10).

    Re: Apple boss Steve Jobs, interesting that his un-planned leave in the middle of Jan caused a bit of a sell-off when the market thought it could be linked to his previous illness…

    Good in Aust that we have the continuous disclosure policy, but must be very hard to police…Steve jobs had an eye removed, an artificial one put in, and was dialling into a board meeting 2 days afterwards..amazing..

    Mark H

    • Ash Little
      :

      I have modeled VOC and am using 17 cents EPS.

      I am also using 3 cents DPS.

      I may be bullish but the future looks bright ” I gotta wear shades”

      • Michael
        :

        Thanks Mark and Ash. I am only getting 11.8 cents EPS from my modelling, so we will see. I am holding off until the release of the June 2011 accounts before re-assessing. I am also factoring in a debt to equity of 92%, and the deficiency of current assets to current liabilities to increase my discount rate slightly. These factors along with the fact that they have acquired some companies recently makes me think there will be a few capital raisings to come. This all adds to an IV of $1.75 for me at this point, and a stock trading well above this level.

    • Roger Montgomery
      :

      Interesting Ron, ..and some thoughts about the changing retail landscape too: “I’ve been standing on the sidelines smiling; it’s hilarious. These companies are trying to cling to a business model which is almost out of date. You can go to a lot of these retailers’ sites and you cannot find what products they sell. They are some of the least Web-friendly businesses in the country. It is like the music or motion picture industry: you can keep trying to fight the ISPs and end-users but at the end of the day, when everyone is doing it as it is cheaper and better, you just have to change your business model. If I can buy something on the internet and have it delivered the next day instead of getting in the car and fighting traffic, I think I’d even pay more for that.”

      • Ron shamgar
        :

        I totally agree. Have u tried shopping online from Harvey Norman or even seeing their product selection online?? They still upload their paper catalogues as PDFs!! :-)

  8. Andrew
    :

    What affect would the NBN if delivered have on Vocus? Is this a competitor? Threat? Opportunity? etc

      • Matty
        :

        Exactly my reasoning when I bought into the original Telstra float. What are the barriers to entry when a company can seemingly just open up another cable at cheaper rates?

        There must be a lot more to this competitive advantage and business analysis than just looking at the big themes. Ok the comparison to TLS is probably a bit unfair if you look at the revenue breakdown, but the barriers to entry? I just don’t get it just yet.

      • Michael
        :

        I am using much more data than I did 5 years ago. Especially since I started being a follower of this blog! But 5 years ago I paid $60/month for my internet. I now pay $50/month (and probably could reduce that if I shopped around). I also get the part about increased downloads in the future, but not how this creates more revenue for the competitors in the industry.

      • Andrew
        :

        Reading some articles after googling NBN and Vocus and came on the below.

        The ASX-listed voice and data network operator’s chief James Spenceley told iTnews it had been “working closely with NBN Co” on issues like voice traffic and “the way the NBN will be wholesaled”.

        “We see a huge area of opportunity for us to become an independent wholesaler to smaller ISPs,” Spenceley said.

        “We’ll possibly offer a layer 3 product to the market if there’s demand from retail service providers.

        “NBN Co has repeatedly indicated it invest only in a layer 2 wholesale network.

        A Layer 2 network is one in which NBN Co would only provide the physical layer (the fibre) and the data link layer of the network – while the internet protocol and other services above those layers would left to ISPs and other organisations to provide.”

        So it appears that there is difintley scope there for vocus to grow through the NBN and as Roger says provide an opportunity as there is another layer above what the NBN will provide that will rely on others for example Vocus. Currently trying to get my head around layer 2 and 3 but is full of technospeak but will see what else i can find on it.

      • Andrew
        :

        I thought the NBN might be some form of competition and linked up to a rival firm. I believe the NBN will encourage more people to use the net, download bigger items and sing up for other services which rely on the transferring of data.

        I have been doing some digging on the NBN co website and can’t find a decent explanation. Is it a case that the NBN would be used by on an australian only basis and linked through peoples ISP’s and those who are a vocus customer will still rely on the the cables vocus have access to to transmit the data from the US etc?

        Sorry for the questions but this company ahs piqued my interest and although i missed the boat i think it might be one i will keep my eye on for the future and want to learn as mucha s i can about it.

  9. ron shamgar
    :

    Attention matrix shareholders:

    as it stands now it looks like there might be an opportunity to receive our full entitlement to matrix share placement. as there is only a 4% margin between today’s price and the offer price, it might be cheaper to purchase shares on market in the next few weeks if there is a bit of volatility in share markets globally.

    keep an eye out as we might be able to get our shares cheaper than those big boy sophisticated institutional investors! :-)

    good luck.

    • Matt R
      :

      Hi Ron

      I got the impression from previous entries that you are a big MOS fan.

      Do you consider there to still be a big MOS for MCE at current prices?

      Regards

      • Ron shamgar
        :

        As Roger says, the bigger the margin the better!
        Current IV is around $10 rising to about $13 in 2013.
        I bought this one around $4 levels, so what’s a big enough MOS for you?
        If u can get it below $8 u most likely will do ok by 2013.
        It’s ur call.

      • Ron shamgar
        :

        Another way of looking at this:

        Matrix is a company that reminds me of one of those really smart school kids who always sit at the front of the class, do their homework, get A+ on their exams and never let you copy off them! Their teachers love them and have very high expectations of them. The problem is when they get an A- or even B+ one day, the teachers are highly disappointed!

        Think of matrix as that kid and the teacher as the share market….get my drift?

  10. Paul
    :

    Hi Guys,

    Whilst VOC has undersea data covered a company called Newsat (NWT) is aiming to become Australia’s first independently owned commercial satellite which they plan to launch in 2013.
    They have just started to turn a profit and have just picked up a contract with the US military as well as securing
    The CEO is a man well regarded in the industry. While I generally stay away from speccy stocks this one caught my attention due to the potential upside.
    But then again funding could be cut tomorrow and there goes their plans.
    This one is one worth keeping an eye on I think.

    • Ron shamgar
      :

      Hi Paul,
      Check out my comment on the latest post. I’m beginning to like this company also.
      Cheers.

      • Ron shamgar
        :

        I have to disagree on this one Ash. You have to think about the end use for each of these technologies.
        How do u provide phone and Internet services to an oil rig or remote mining site? Think about it…

      • Ron shamgar
        :

        Going even further, I think the ultimate technology or medium to deliver data is by satellites. That is the future as technology improves.
        what do you think? Running long cables all over the world and under oceans or beaming it through space? What looks like the future to you?
        By the way, it doesn’t mean Vocus is not a great business. I own it and will keep buying more…

        All the best.

      • Ash Little
        :

        Hi Ron,

        Comes down to speed

        Speed can only made satelites niche players in my view.

      • Andrew
        :

        I think it depends on what type of user you are looking at. I am no expert in this view but i am getting the hang of it here and i obviously use the internet.

        I use a wireless provider and the speeds can be sometimes on the slow side and getting a signal can sometimes be harder depending on what room of the house you are in.

        Cable has the speed and reliablitlity in its favour but wireless has the accessability in its favour. My thoughts is that it will come to overall costs to the end user.

        Some people will place more significance on the speed, some might only be able to use wireless due to location. My thoughts are that if wireless can ever be as quick and reliable as cable than that is when i expect cable to be in trouble. In the meantime, i think in a slug out cable will win.

      • Matt R
        :

        I’m an ex-military guy and I can vouch that fibre optic has limited utility on the front line of military operations regardless of its speed, especially in the middle of nowhere (think Afghanistan). There will always be a place for satellite technology- think sat phones where there is no mobile phone coverage…

        but I don’t know anything about this company as yet…

        Thanks to the bloggers who brought it to our attention.

      • Andrew
        :

        I agree, but i think those instances might make up the minority rather than the majority in the market with most having access to both and will then be able to make decisions on what is the better fit.

        ISP’s and other telecomunication services companys i think will need to offer both which means that as long as there is a need to provide customers with cable connections than Vocus has a business.

      • Paul
        :

        Hi Ash,

        While nothing can physically travel faster than light it is impossible for all corners of Australasi/Middle East to be optically connected.

        The speed of data from the new Jabiru satellite will be greater than what most households have these days on adsl 2. Of course this has to be put into perspective when (if) the NBN gets fully rolled out.

        Vocus announcing a takeover for Newsat…. Now that would be interesting.

        Here is an pdf I found on a similatr company in the UK that launched its first satellite.

        http://www.newsat.com/Download-document/98-Profile-of-a-comparable-company.html

        Paul

      • Pat gavin
        :

        I agree Ash,but remember they are both only transmission mediums both are required, with optic fiber being like Buffetts train company,cheaper to move data but we still need trucks.

      • Ash Little
        :

        Hi Pat,

        Very True,

        I would prefer to own the railway. Trucks have no competitive advantage.

        Lowest cost producer stuff.

  11. David Sinclair
    :

    There is one risk with this company that is worth considering. Their customers are mostly small/medium independent ISPs. The big ISPs tend to buy IRUs directly from the cable owners. Vocus portray this as an advantage for them, in that they are the obvious wholesaler of choice for small/medium ISPs, but it also means that Vocus’s prospects are strongly linked to the performance of the independents. If the independents can hold on to market share then Vocus will benefit from overall growth in internet use. On the other hand, if there is an industry shakeout which results in independent ISPs either being taken over by the majors or going out of business then Vocus could find themselves left with a shrinking customer base while the major ISPs reap the benefits of the growth.

    David S.

  12. Nick Mason
    :

    An enjoyable read Roger.

    If you continue to write and talk about Vocus I hope that you wont forget also to mention their expanding data storage center businesses. Vocus operates profitable data center businesses in Melbourne and Sydney which are by all accounts top rate centers. The Honorable Malcolm Turnbull even officiated at the recent Sydney opening and was full of praise.

    Also, Vocus has just acquired Perth IX, widely regarded as Perth”s premier data storage business (at 4 times EBITDA) and had the good foresight to convince the General Manager to stay on and run the show.

    I realise that you have word limits and restrictions although this is an important part of the overall picture which will provide useful and important information to prospective investors.

  13. Andrew
    :

    Thanks for the answer Roger. I don’t think they would wait until the end either but just wanted to know if it was a case that it can be renewed.

    It was one of the things i am investigating as i research this company and industry a bit thoroughly as i think electronic transferring of data will only grow in importance as technology for almost everything gets better.

    Thanks and keep up the good work Roger.

  14. Michael
    :

    Does anyone have any earnings forecasts for VOC that they are using to calculate the IV?

    Alot of the profit for the half year to December was FX that will not be repeated, so this needs to be factored into any calcuations based of the half year report.

    I can’t make the numbers work for this one yet, so have not invested.

    • Roger Montgomery
      :

      Hi Michael,

      Good observation. They did however make an even bigger currency gain in the previous corresponding period (pcp) so we cannot say it WON’T be repeated. Also, a $1.4 million hedging loss was taken up in the change to equity.

      • Michael
        :

        Hi Roger,

        Thanks for your reply.

        From looking at the financial statements, the FX gain appears to be from the borrowings to fund the IRU purchases. As the loans are denominated in USD, the appreciation of the AUD against the USD has lead to gains being recorded. However in November 2010, the company announced that it had hedged the loans, are therefore further gains would not be expected.

        The amount going through equity for hedging was $1,417, not $1.4 million (accounts not rounded to 000’s).

        I have also noticed that the ROE for Pipe Networks (prior to takeover) and TPG aren’t all that great.

        These points may turn out to be insignificant, and focussed only on the rear view mirror. But without access to reliable forecasts, I am struggling to justify investing at this stage, but appreciate you providing ideas for further research.

      • Roger Montgomery
        :

        True,

        But the company is not standing still. Agree on Pipe. Good spotting on the hedge and thanks for the gentle and appropriate slap on the wrist for not looking at the column heading. What time was it when I responded? In all seriousness, regarding your earlier comments about the repeatability of the currency gains, I just met with Jim Roger’s (as did many in my industry – thanks for the lift home Matt and John) and he said “don’t sell your Aussie dollars”. Someone else privately told me Jim believes the Aussie could go to $1.40 against the USD!!! Re; not able to justify investment, that’s what makes a market I guess.

  15. Brad J
    :

    Hi Roger,

    I know that buying at big discounts to intrinsic value are important with just about all investments. But I agree with you on this one when you say that current estimates of intrinsic value are almost insignificant with a company like voc as they have extraordinary bright prospects. In my opinion this has got to be the best opportunity around at present. Thank you so much for bringing it to our attention and for explaining the business so simply.

  16. Ash Little
    :

    Thanks Roger,

    Being Gen X it took me awhile to understand this one but once I did it was an eyepopper.

    • Richie
      :

      What browser are you using? When I opened it from Safari I got 2 blank pages. However when I opened it from Firefox, I got the report OK.

    • Matthew R
      :

      I have seen the same on the iPhone and iPad – try using an old computer (one that plugs in to a wall)

  18. Andrew
    :

    Nice article Roger and i love the simplicity you can explain something. After hearing the toll road analogy it made even more sense. This company intrigued me but as i didn’t understand it i passed on it. Since having a look at the information and links provided by a fellow graduate i managed to work out what they do and your article above proved that i was right so thats a plus. Still have lots to learn about it though before i can consider it as an investment. The management looks like a solid line up for this type of business.

    What happens after the IRU period ends. I assume it would be a case of them needing to negotiate and renew it on new terms or is the useful life of the cable over?

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