When East Meets West

When East Meets West

For many years, Vocus Communications (ASX: VOC) and Amcom Telecommunications (ASX: AMM) have enjoyed strong earnings growth by operating at opposite ends of the country: Vocus in the eastern states and Amcom in the western states.

Amcom has fibre networks predominantly in Western Australia but also in South Australia and the Northern Territory. The company provides data, unified communications and cloud services to small and medium-sized businesses. In recent periods, Amcom has been focused on achieving growth by selling a larger range of solutions to its existing client base.

Vocus on the other hand has a network of data centres, dark fibre and internet connectivity predominantly on the eastern seaboard. Its position was shaped by initially buying capacity on international cables, such as Southern Cross, and on-selling this ‘wholesale’ capacity to retail players.

In contrast to Amcom, Vocus appears to be expanding by increasing capacity. In a recent announcement, Vocus acknowledged that Western Australia is a key growth market for the company and it has thus been extending its metropolitan fibre network in Perth and also purchased a 10 per cent interest in the Sea-Me-We 3 cable, the only undersea cable connecting Perth to Asia. This deal has greatly expanded the business’ capacity in the west.

Amcom has likewise stated that it is looking to build on its strategy by acquiring a major solutions provider in the eastern states, particularly as growth appears to be maturing in their home market.

Given Vocus and Amcom share similar operations, will they be able to maintain growth as they start expanding into each other’s backyards?

Only the future will tell. However, at first blush we think that the move by Vocus into Western Australia may have greater implications for Amcom, rather than the other way round.

The major share of Amcom’s revenues is derived from customers on its fibre network in WA. While revenue from solutions products is growing at a faster rate, the profit margins are lower, and may not insulate the company’s earnings if Vocus is able to attract Amcom’s customers onto their network. By contrast, Amcom’s eastern expansion does not appear to directly affect Vocus’ fibre network business, but it is a clear attempt by the business to diversify its earnings.

Both companies are held in the Montgomery funds. Amcom and Vocus remain high quality businesses, but we will be watching their developments closely in the months and years ahead.