AUSTRALIA Price Event Valuation A$ month target A$ 5.20

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1 AUSTRALIA VOC AU Price (at 05:10, 22 Feb 2017 GMT) Outperform A$4.81 Valuation A$ DCF (WACC 7.7%, beta 1.2, ERP 5.0%, RFR 3.3%, TGR 1.0%) 12-month target A$ month TSR % Volatility Index Medium GICS sector Telecommunication Services Market cap A$m 2, day avg turnover A$m 18.6 Number shares on issue m Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m , , ,051.7 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x VOC AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2017 (all figures in AUD unless noted) 23 February 2017 Macquarie Securities (Australia) Limited Not out of the woods just yet Event Vocus reported 1H17 EBITDA of $187.3m, 3.3% below our pre-result expectation of $193.7m. Impact Positives Reiteration of guidance, synergy capture, improving sales momentum, disclosures: (1) Vocus was able to reiterate guidance for the full year, which the market had been sceptical of leading into the result. While the quality will be debated, this outcome in itself is a positive; (2) Vocus appears to be doing a good job on capturing synergies, with the run-rate up from $18m at 30 June to $47.5m at 31 December, which puts it on track to be ahead of the $57m run-rate previously flagged for 30 June this year; (3) Sales momentum does look to have improved/stabilised following some of the issues noted at the AGM address around NextGen sales (slowing ahead of transaction completion), as well as the adverse impacts from Corporate and Consumer provisioning issues. Vocus also looks well positioned in the Government segment; (4) Disclosure has been greatly improved, with segment reporting to EBITDA across Mass Market, Corporate/Wholesale and NZ. Consistency around these disclosures should give greater comfort to underlying trends going forward. Negatives Cash flow, 2H skew and likely reliance on lumpy sales: (1) Cash conversion was weak at 71% due to poor working capital management and higher-than-expected deferred subscriber acquisition costs. The latter totalled $28m for the half and will be $42m for the year across the business (mostly Mass Market) (compared with ~$16m impact to the FY15 accounts on a pro forma basis, as flagged in the MTU scheme documents). This presents a ~$40m earnings headwind into FY18. It also, creates a ~$14m skew to firsthalf earnings relative to second half; (2) To achieve the bottom end of its fullyear guidance range, Vocus needs to generate an additional $56m in EBITDA in 2H17 relative to 1H17 ($243m vs $187m). If we allow for the deferred SAC impact, this grows to $70m. Key contributors will include a $20 25m benefit from full-period ownership of NextGen plus $10 15m from synergies. The rest will need to come from improved sales momentum, cost out, the cycling of some operational issues (such as provisioning), and potentially some lumpier network sales. We see Vocus coming in just below the bottom end of its EBITDA guidance range ($428m). For FY18 we sit ~7% below pre-result consensus (excluding cable IRU gain on sale assumptions). Earnings and target price revision EPS changes: FY17E: -0.1%; FY18E: -6.8%; FY19E: -9.2%. Downgrades reflect above as well as higher D&A. EBITDA downgrade is 1.4% in FY17E then ~3.5% for FY18E and FY19E. TP reduced 10cps to $5.20. Price catalyst 12-month price target: A$5.20 based on a DCF methodology. Catalyst: NBN subscriber growth and further contract wins. Action and recommendation There is still some work to do to stabilise earnings and re-base consensus expectations, as discussed above. Against that, we remain of the view that Vocus controls a good asset set from which it can drive solid medium-term growth. Should this prove to be the case, upside exists to current valuations. Retain Outperform. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 The good, the bad, the interesting The good The bad The interesting Despite ongoing integration challenges, Vocus was able to reiterate FY17 EBITDA guidance of $ m. It also reiterated guidance for revenue (~$1.9bn) and NPAT ($ m). Indications from management suggest that the Vocus sales pipeline is improving on a number of fronts, including for NBN (picking up in February) and Corporate (including the deal). This bodes well after provisioning, and integration issues impacted converted sales numbers in 1H17. Reporting disclosures have improved. Visibility into operations has been limited in recent periods, largely complicated by recent M&A activity. New disclosures include segment results for Corporate/ Wholesale, Consumer and NZ, as well as useful commentary on contributions from acquisitions to these results. Vocus looks on track to meet, and probably beat, existing targets for synergies from its recent acquisitions. The synergy run-rate had increased from $18m to $47.5m by year-end, and there is scope for Vocus to be ahead of the $57m target for June of this year. Vocus s NBN share rose from 6.4% to 7.8% (ex satellite), which presents a growth opportunity for the company as the NBN rollout accelerates in coming periods. Vocus also grew its share in UFB connections in New Zealand to 12%. NBN churn of 1.3% remains well below copper broadband churn of 3.0%. NBN churn fell relative to a year ago from 1.5%, which is very encouraging as the NBN roll out accelerates. Organic growth from Corporate & Wholesale business (AU) was 8% on pcp. This was despite some provisioning issues impacting sales conversion during the half. Vocus benefited in the period from better terms on its debt following a renegotiation in February Source: Company data, Macquarie Research, February 2017 Cash conversion was very weak at 71%, which management attributed to a lack of discipline around working capital management and also the capitalisation of customer acquisition costs, mostly in mass market. Management expects improved cash flow and conversion in 2H17, reflecting a normalisation of working capital balances and significant management focus on improving collections and working capital performance. Given this weak cash conversion, net debt increased to $988m, which was $56m above of our preresult forecast. Given weak cash conversion and elevated capex levels, we see year-end net debt/underlying EBITDA at 2.2x. In part due to ASC, this is above the 2.0x guided by management at its AGM. Management noted that as at 31 December it had 1.2x in headroom to its covenants. Capitalisation of customer acquisition costs was higher than expected at $28m in the half and is expected to be $42m across the year. As this unwinds, it will provide a challenge to 2H17 EBITDA growth (vs 1H) and also for FY18 EBITDA growth (vs FY17). Vocus is relying on a very heavy second-half skew to reach FY17 guidance. Effectively 2H EBITDA will need to $56m greater than 1H, and this gap stretches to $70m if we adjust for the earnings impact of capitalised customer acquisition costs. As discussed, key drivers are expected to come from NextGen, business synergies and improved operational performance after a number of incidents slowed momentum and earnings in 2H17. Vocus only added 14k consumer broadband SIOs in the half (2H16 +33k), in part due to provisioning issues. As flagged, copper broadband churn increased from 2.6% to 3.0%. Vocus declared an interim dividend of 6cps, which was below last year. Wording on the outlook for dividends changed, with the Board expecting to review dividend payments in line with the growth of the business, where previously it had committed to increase dividends in line with the growth of the business. Significant items in the period included $16m of acquisition and integration costs ($20m for the year), as well as a small loss on the sale of Connect8 to Spark NZ. Capex for the half was $93m excluding the ASC project (~$115m including ASC). 2H17 depreciation and amortisation (excluding PPA) are expected to be ~$50m and ~$10m. respectively. These levels are higher than previous guidance and reflect the decision to proceed with the build of ASC. Vocus acquired Switch Utilities, a small energy retailer in New Zealand during the period, as it looks to achieve benefits from having low incremental cost to serve and reduced churn across its platform. The Switch offering will initially be bundled under the Slingshot brand. Vocus is looking to relaunch and re-invigorate the iprimus brand, seeing it as a key plank in its NBN go-to-market strategy. The relaunch will be coupled with a mobile-first digital strategy, and will seek to appeal to more aspirational under- 40s consumers than the Dodo brands. For further reading please refer our detailed initiation report Vocus Communications Good assets, tough times, 2 February February

3 Vocus Communications (VOC) $4.81 Interim 1H16 2H16 1H17 2H17e Full year FY16 FY17e FY18e FY19e Revenue $m Revenue $m , , ,051.7 Opex $m Opex $m , , ,549.0 EBITDA $m EBITDA $m D&A $m D&A $m EBIT $m EBIT $m Associates $m Associates $m EBIT incl. assoc $m EBIT incl. assoc $m Net Interest Expense $m Net Interest Expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Minority Interests $m Minority Interests $m Adjusted Earnings $m Adjusted Earnings $m NRIs (net of tax) $m NRIs (net of tax) $m Amortisation of PPA $m Amortisation of PPA $m Reported Earnings $m Reported Earnings $m EPS (Adj/dil) cps EPS (Adj/dil) cps EPS Grow th % 29.1% 97.3% 28.4% 7.7% EPS Grow th % 61.9% 16.3% 11.6% (5.8%) DPS cps DPS cps Payout ratio (adj) % 81.2% 48.2% 39.9% 58.5% Payout ratio (adj) % 61.8% 50.0% 50.0% 50.0% FCF/sh cps FCF/sh cps FCFE yield % FCFE yield % 2.8% 0.7% 0.5% 5.1% EBITDA margin % 34.9% 23.4% 21.1% 24.8% EBITDA margin % 25.9% 23.0% 25.3% 24.5% EBIT margin % 24.6% 19.3% 16.1% 18.6% EBIT margin % 20.4% 17.4% 19.0% 17.7% EBITDA grow th % 184.4% 420.3% 204.9% 57.0% EBITDA grow th % 320.6% 99.3% 17.7% (0.2%) EBIT grow th % 214.8% 556.3% 230.0% 43.6% EBIT grow th % 413.8% 91.2% 16.8% (4.1%) Key assumptions 1H16 2H16 1H17 2H17e Key assumptions FY16 FY17e FY18e FY19e Broadband SIOs k Broadband SIOs k Broadband share % 6.8% 7.0% 7.0% 7.1% Broadband share % 7.0% 7.1% 7.3% 7.6% NBN SIOs k NBN SIOs k NBN share % 5.9% 6.5% 7.0% 7.3% NBN share % 6.5% 7.3% 7.5% 7.8% Profit and Loss Ratios FY16 FY17e FY18e FY19e Cashflow Analysis FY16 FY17e FY18e FY19e Revenue grow th % 457.0% 123.9% 7.1% 3.1% EBITDA $m % of EBITDA in 1H % 28.6% 43.8% 49.6% 49.5% Ch in Working Capital $m Effective Tax Rate % 30.4% 29.0% 30.0% 30.0% Net Interest Paid $m PER (adj) x Tax Paid $m EV/EBIT x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Capex $m Balance Sheet Ratios FY16 FY17e FY18e FY19e Asset Sales $m Other $m ROE % 3.8% 3.6% 3.8% 3.6% Investing Cashflow $m ROFE % 3.5% 4.9% 5.8% 5.5% Dividends Paid $m ROA % 2.6% 4.1% 4.9% 4.7% Equity movements $m Net Debt $m Debt movements $m Net Debt/Equity x Other $m Net Debt/EBITDA x Financing Cashflow $m Interest Cover (EBIT) x EFPOWA m Net Cashflow $m Divisional estimates FY16 FY17e FY18e FY19e Balance Sheet FY16 FY17e FY18e FY19e Corporate AU - Core $m Cash $m Corporate AU - NextGen $m Receivables $m Corporate AU - Projects $m Inventories $m Corporate AU - Total $m Investments $m Consumer AU - Telecoms $m PP&E $m Consumer AU - Energy $m Intangibles $m Consumer AU - Total $m Other Assets $m New Zealand $m Total Assets $m Other $m Payables $m Total revenues $m 1, , , ,124.0 Short Term Debt $m Long Term Debt $m Snapshot Current Provisions $m Current price $ 4.81 Other Liabilities $m EFPOWA # Total Liabilities $m Market cap $m 2,964.4 Shareholders Funds $m Net debt $m Minority Interests $m EV $m Shaereholder Equity $m Source: Company data, Macquarie Research, February February

4 Macquarie Quant View The quant model currently holds a strong negative view on. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 169/179 Global rank in Telecommunication Services % of BUY recommendations 57% (8/14) Number of Price Target downgrades 2 Number of Price Target upgrades 0 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Telecommunication Services) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Profit Margin FY1 Profit Margin NTM Operating Leverage NTM Net Income Margin NTM Sales Growth FY1 DPS Growth FY1 Relative Turnover DPS Revisions 3 Month Negatives Positives -22% -26% -19% -20% 24% 21% 36% 36% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/179) Percentile relative to market(/422) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 23 February

5 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) VOC AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February month target price methodology VOC AU: A$5.20 based on a DCF methodology Company-specific disclosures: VOC AU: Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of Vocus Communications Ltd. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 02-Feb-2017 VOC AU Outperform A$5.30 Target price risk disclosures: VOC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business 23 February

6 This publication was disseminated on 22 February 2017 at 15:26 UTC. in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 23 February