Vocus to refresh Orcon as CallPlus acquisition boosts NZ earnings

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ASX-listed Vocus Group plans to refresh local broadband provider Orcon in a bid to get more out of its New Zealand consumer businesses facing skinnier margins in the face of tough competition.

Sydney-based Vocus more than doubled underlying earnings before interest, tax, depreciation and amortisation from its New Zealand division to $60.9 million on a 126 per cent jump in revenue to $342m after a merger with rival M2 Group last year brought the CallPlus, 2talk, Orcon, Slingshot and Flip businesses and local fibre line provider previously called FX Networks under one umbrella. More recently, Vocus added energy retailer Switch Utilities to its Kiwi stable.

However, this month Vocus wrote down the value of the New Zealand division by A$199m (NZ$217m) as part of a wider group impairment of A$1.53 billion as consumer businesses on both sides of the Tasman are beset by growing competition tensions squeezing profitability.

That showed up in the New Zealand division where ebitda margins shrank to 18 per cent from 20 per cent a year earlier and as broadband average revenue per user shrank to $71.21 a month from $71.37 a year earlier. On a pro forma basis, New Zealand earnings shrank 8.7 per cent, even as revenue gained 8 per cent.

"The consumer businesses in both Australia and New Zealand are focused on lower costs and improving the customer experience through automating the customer interface and backend platforms in turn, driving lower churn rates," Vocus said in a statement to the ASX. That focus will see "a consolidation of the consumer brands in New Zealand with a reinvigoration of the Orcon brand and business model."

Vocus's New Zealand unit has grabbed a 13 per cent share of the ultra-fast broadband market with 45,000 customers, up from 27,000 a year earlier, offsetting the 21,000 copper line customers it lost, leaving it with 144,000.

Last week, Spark New Zealand chief executive Simon Moutter, who heads the country's biggest telecommunications company, said competition among domestic internet service providers had squeezed margins to the point where it was barely profitable, and he expected to see consolidation in the sector.

Still, the growing number of UFB resellers offers Vocus's local enterprise and wholesale division "significant growth opportunities", as does the government sector.

Broadband service provision has attracted content providers such as media group Fairfax New Zealand and pay-TV operator Sky Network Television trying to build vertical integration, while power companies such as TrustPower and more recently Contact Energy have seen it as an opportunity to offer bundled utility packages.

Vocus went down that latter path with Switch Utilities, which has 5,000 customers, up from the 2,300 or so the minnow electricity retailer brought with it when it was purchased in December, which the company said "has already created momentum in bundling opportunities in the consumer business, albeit from a low base."

The New Zealand division is forecast to generate high single digit revenue growth in the 2018 financial year and low single digit earnings growth.

The wider Vocus group sank into the red in the year ended June 30, posting a loss of A$1.47b due to the impairment charges, even as revenue more than doubled to A$1.82b. Private equity firms KKR and Affinity recently had a look under Vocus's hood, but decided against going ahead with formal bids. However, that interest shook out other approaches to buy parts of the firm's portfolio, and Vocus said it's identified a number of Australian assets with material value that might not be core to the business.

The board's reviewing the case to sell those units and will update the market at or before next month's annual meeting.

Vocus's board decided against declaring a final dividend and doesn't expect it will pay an interim dividend in the 2018 financial year.

The ASX-listed shares increased 2.7 per cent to A$2.69, having slumped 32 per cent so far this year.