March 10, 2016

INITIATION Vocus Communications Ltd. (VOC.AX)

Neutral Equity Research Well positioned for growth, stock fairly valued; initiate at Neutral

Investment view Investment Profile We initiate on Vocus Communications (VOC) at Neutral with a 12-month Low High price target of A$8.50. The transformative merger with M2 Group (MTU) Growth Growth brings together infrastructure assets with a large customer base and Returns * Returns * Multiple Multiple distribution network, to create Australia’s 4th largest fixed line telco (3rd in Volatility Volatility NZ). We believe its improved competitive positioning and lower product Percentile 20th 40th 60th 80th 100th pricing vs. TLS/Optus (and lower risk of legacy revenue cannibalization), Vocus Communications Ltd. (VOC.AX) will enable it to increase its c.7% share in the A$18bn AU fixed line Australia CME Peer Group Average market. However, with VOC trading at 20X FY17E P/E (vs. domestic peers * Returns = Return on Capital For a complete description of the investment profile measures please refer to the 11-21X), we believe the stock offers limited upside on a 12-month view. disclosure section of this document.

Core drivers of growth Key data Current Price (A$) 7.98 We forecast FY16E-FY19E revenue CAGR +36%, EBITDA +35%, EPS +21%. 12 month price target (A$) 8.50 Key drivers include: (1) incorporation of MTU earnings including cost Market cap (A$ mn) 4,244.5 synergies; (2) organic growth in both Corporate and Consumer segments 6/15 6/16E 6/17E 6/18E NPAT preNRIs (A$ mn) 18.1 105.1 216.3 258.3 with VOC exposed to positive industry themes – secular demand for data EPS adj (A¢) 17.2 31.4 40.7 48.6 is driving take-up of high bandwidth corporate products and the NBN is EPS growth (%) 7.0 82.4 29.6 19.4 PER (X) 33.3 25.4 19.6 16.4 driving a transition to a reseller market and new market opportunities in DPS (A¢) 8.3 15.6 17.0 24.0 Dividend yield (%) 1.4 2.0 2.1 3.0 Consumer: (3) revenue synergies including lower consumer churn and Frank/Imput (%) 100.0 100.0 100.0 100.0 greater product sales over VOC infrastructure; and (4) attractive P/FCFPS (X) 76.4 79.1 27.6 21.8 EV/EBITDA (X) 13.8 14.8 11.2 9.7 economics in VOC’s core corporate business with 3yr payback on capex P/BV (X) 3.1 1.5 1.4 1.4 Avg shares (fd) (mn) 105.5 335.2 531.9 531.9 and strong incremental margins. In the medium term, we believe VOC Debt/equity (%) 53.3 21.5 18.9 16.2 will explore M&A opportunities to increase scale and capabilities. Price performance chart Risks to the investment case 9.0 6,200 (+) Higher than expected market share wins & synergies, M&A. 8.5 6,000 (-) Competition, integration risk, lower than expected synergies. 8.0 5,800 7.5 5,600 Valuation 7.0 5,400 Our 12m target price of A$8.50 is based on an average of our DCF and 6.5 5,200 6.0 5,000 EV/EBIT methodologies. 5.5 4,800

5.0 4,600 Industry context Mar-15 Jun-15 Sep-15 Dec-15

We estimate VOC’s addressable markets as: (1) A$18bn AU fixed line Vocus Communications Ltd. (L) S&P/ASX 200 (R) (A$7bn Consumer, A$11bn Corporate); and (2) NZ$3bn NZ fixed line. INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Neutral Absolute 6.5 32.1 45.1 Rel. to S&P/ASX 200 4.2 30.7 64.1

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 3/10/2016 close. Coverage View: Neutral Raymond Tong +61(3)9679-1359 [email protected] Goldman Sachs Australia Pty Ltd Goldman Sachs does and seeks to do business with companies Kane Hannan covered in its research reports. As a result, investors should be +61(3)9679-1862 [email protected] Goldman Sachs Australia Pty Ltd aware that the firm may have a conflict of interest that could Anita Dinshaw affect the objectivity of this report. Investors should consider +61(3)9679-1217 [email protected] Goldman Sachs Australia Pty Ltd this report as only a single factor in making their investment

decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Vocus Communications Ltd.: Summary Financials

Profit model (A$ mn) 6/15 6/16E 6/17E 6/18E Balance sheet (A$ mn) 6/15 6/16E 6/17E 6/18E

Total revenue 149.0 879.2 1,933.8 2,062.5 Cash & equivalents 15.2 99.9 99.9 99.9 Cost of goods sold (64.5) (471.0) (1,134.7) (1,192.7) Accounts receivable 22.7 133.8 294.4 314.0 SG&A (33.4) (187.0) (369.9) (381.6) Inventory 1.0 6.1 13.3 14.2 R&D 0.0 0.0 0.0 0.0 Other current assets 3.1 15.7 15.7 15.7 Other operating profit/(expense) 0.5 1.7 1.7 1.7 Total current assets 41.9 255.5 423.3 443.8 EBITDA 51.6 222.9 430.9 489.9 Net PP&E 204.6 526.7 583.8 646.0 Depreciation & amortization (18.1) (48.5) (82.2) (85.1) Net intangibles 125.4 3,308.9 3,251.2 3,206.9 EBIT 33.5 174.4 348.8 404.8 Total investments 0.0 0.0 0.0 0.0 Interest income 0.8 1.4 2.5 2.5 Other long-term assets 11.4 95.0 100.0 100.0 Interest expense (6.1) (25.7) (42.3) (38.3) Total assets 383.3 4,186.1 4,358.4 4,396.7 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 Accounts payable 24.2 142.7 313.8 334.7 Pretax profits 28.2 150.2 309.0 369.0 Short-term debt 1.8 18.3 18.3 18.3 Income tax (10.1) (45.1) (92.7) (110.7) Other current liabilities 14.9 36.8 36.8 36.8 Minorities 0.0 0.0 0.0 0.0 Total current liabilities 40.9 197.7 368.9 389.7 Long-term debt 118.0 706.1 642.6 575.3 Net income pre-preferred dividends 18.1 105.1 216.3 258.3 Other long-term liabilities 28.3 381.8 381.8 381.8 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 146.2 1,087.9 1,024.4 957.1 Net income (pre-exceptionals) 18.1 105.1 216.3 258.3 Total liabilities 187.1 1,285.6 1,393.3 1,346.8 Post-tax exceptionals 1.7 (36.2) (64.7) (45.9) Net income 19.9 69.0 151.6 212.4 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 196.2 2,908.6 2,973.3 3,058.0 EPS (basic, pre-except) (A¢) 17.2 31.4 40.7 48.6 Minority interest 0.0 (8.2) (8.2) (8.2) EPS (basic, post-except) (A¢) 18.8 20.6 28.5 39.9 EPS (diluted, post-except) (A¢) 18.8 20.6 28.5 39.9 Total liabilities & equity 383.3 4,186.1 4,358.4 4,396.7 DPS (A¢) 8.3 15.6 17.0 24.0 Dividend payout ratio (%) 44.1 75.8 59.7 60.1 BVPS (A¢) 186.0 546.8 559.0 574.9 Free cash flow yield (%) 1.3 1.3 3.6 4.6

Growth & margins (%) 6/15 6/16E 6/17E 6/18E Ratios 6/15 6/16E 6/17E 6/18E Sales growth 62.4 490.1 119.9 6.7 CROCI (%) 19.0 7.6 7.7 8.4 EBITDA growth 56.4 332.3 93.3 13.7 ROE (%) 11.9 4.4 5.2 7.0 EBIT growth 55.2 421.0 100.0 16.1 ROA (%) 6.7 3.0 3.5 4.9 Net income growth 53.6 247.5 119.8 40.1 ROACE (%) 9.7 6.4 6.9 8.0 EPS growth 18.6 9.4 38.5 40.1 Inventory days 2.9 2.7 3.1 4.2 Gross margin 56.7 46.4 41.3 42.2 Receivables days 39.7 32.5 40.4 53.8 EBITDA margin 34.6 25.4 22.3 23.8 Payable days 108.9 64.7 73.4 99.2 EBIT margin 22.5 19.8 18.0 19.6 Net debt/equity (%) 53.3 21.5 18.9 16.2 Interest cover - EBIT (X) 6.3 7.2 8.8 11.3

Cash flow statement (A$ mn) 6/15 6/16E 6/17E 6/18E Valuation 6/15 6/16E 6/17E 6/18E Net income pre-preferred dividends 18.1 105.1 216.3 258.3 D&A add-back 18.1 48.5 82.2 85.1 P/E (analyst) (X) 33.3 25.4 19.6 16.4 Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) 3.1 1.5 1.4 1.4 Net (inc)/dec working capital 1.0 2.3 3.3 0.4 EV/EBITDA (X) 13.8 14.8 11.2 9.7 Other operating cash flow 5.4 (20.0) (5.0) 0.0 EV/GCI (X) 2.0 0.8 1.1 1.1 Cash flow from operations 42.6 135.9 296.8 343.8 Dividend yield (%) 1.4 2.0 2.1 3.0

Capital expenditures (34.7) (102.1) (142.9) (148.8) Acquisitions (53.9) (2,700.9) 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others 3.0 84.7 0.0 0.0 Cash flow from investments (85.6) (2,718.3) (142.9) (148.8)

Dividends paid (common & pref) (2.2) (83.0) (90.4) (127.7) Inc/(dec) in debt 10.4 49.2 (63.5) (67.3) Common stock issuance (repurchase) 0.9 2,700.9 0.0 0.0 Other financing cash flows 4.5 0.0 0.0 0.0 Cash flow from financing 13.6 2,667.1 (153.9) (195.0) Total cash flow (29.4) 84.7 0.0 0.0 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Analyst Contributors

Raymond Tong [email protected]

Kane Hannan [email protected]

Anita Dinshaw [email protected]

Goldman Sachs Global Investment Research 2 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Contents

Executive Summary 4 Company strategy and profile 6 Outlook and key stock drivers 12 Building blocks in place to win share across Consumer & Corporate 12 Corporate: Infrastructure ownership, secular demand for data, strong economics 12 Consumer: Strong industry growth, NBN opportunity 14 Synergies: We see upside from potential revenue synergies 16 We expect VOC will continue to pursue M&A opportunities 18 Industry overview 20 Financial forecasts 25 Valuation 27 Key risks 29 Board and Senior management 30 Appendix 1 – Economics of VOC/MTU migration to NBN 31 Economics of migration from TLS copper to NBN 31 Economics of migration from PSTN services to hosted voice 31 Appendix 2 – Consumer Broadband Plans 32 Appendix 3 – Telco Glossary 32 Disclosure Appendix 33

Goldman Sachs Global Investment Research 3 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Executive Summary

Well positioned for growth; stock fairly valued; initiate at Neutral We initiate coverage on Vocus Communications (VOC) with a Neutral rating and 12-month price target of A$8.50. The transformative merger with M2 Group (MTU) brings together infrastructure assets with a large customer base and distribution network, to create Australia’s 4th largest fixed line telco (and 3rd in NZ). We believe its improved competitive positioning and lower product pricing vs. TLS/Optus (and lower risk of legacy revenue cannibalization), will enable it to increase its c.7% share of the A$18bn AU fixed line market. However, with the stock trading at 20X FY17E P/E (vs. domestic peers 11-21X) we believe the stock offers limited upside on a 12-month view.

Key drivers of growth We forecast FY16E-FY19E revenue CAGR +36%, EBITDA +35%, EPS +21%. Key drivers include: (1) incorporation of MTU earnings including cost synergies; (2) organic growth in both the Corporate and Consumer segments; (3) revenue synergies including lower consumer churn and greater product sales over VOC infrastructure; and (4) attractive economics in VOC’s core infrastructure based corporate business.

We believe VOC is well positioned to drive growth: Positioned to increase market share:

 Low market share in a large addressable market: We estimate VOC/MTU has low market share: (1) 6% of the A$7bn Australian fixed line Consumer market; (2) 7% in A$11bn fixed line Corporate market; and (3) c.9% share of NZ$3bn NZ fixed line market.

 Improved competitive positioning following consolidation: We believe VOC has a stronger competitive positioning following its transformative M&A with MTU, combining: (1) national fibre network; (2) national distribution assets; and (3) increased scale.

 Lower pricing vs. incumbents: (1) in Corporate, VOC seeks to price its products c.15% below TLS; (2) in Consumer, we estimate MTU through the Dodo brand prices broadband products at c.20-40% discount to incumbents TLS/Optus, while at largely similar levels to TPM. Exposure to positive industry themes:

 Corporate: We believe VOC will continue to benefit from secular demand for data that is driving demand for high bandwidth products. We believe: (1) the economics are positive in the Corporate segment with 3-year payback for capex investments and strong incremental margins; and (2) VOC does not have significant exposure to the risks of cannibalization of legacy products unlike its larger competitors TLS and Optus.

 Consumer: We believe VOC, given its low market share, stands to benefit from the rollout of the National Broadband Network (NBN) in Australia and Ultra-Fast Broadband (UFB) in NZ. This could potentially be an opportunity for VOC to win market share as customers migrate from copper to the NBN/UFB and the industry transitions to a reseller model in Australia.

Goldman Sachs Global Investment Research 4 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Synergies from consolidation:

 Costs: VOC is targeting c.A$40mn of cost synergies by FY18E. We note this represents c.4% of VOC/MTU combined cost base, which looks conservative compared with recent transactions.

 Revenues: We believe the key areas of revenue synergies include: (1) lowering Consumer broadband churn from high levels of c.2.8%/month by increasing use of VOC infrastructure to improve bandwidth capacity; and (2) leveraging MTU’s sales force and distribution assets to increase product sales to SMB segments in VOC on-net buildings.

We expect VOC to continue to explore M&A opportunities While the Australian telco market has consolidated, we expect VOC to continue to explore M&A opportunities across Australia and New Zealand (ANZ) to increase its network footprint, scale and capabilities, consistent with management’s stated strategy.

We assume VOC will deleverage from its proforma 1H16 Net Debt/EBITDA 2.0X to 1.0X by FY18E. While its dividend policy is yet to be determined, we have assumed a dividend payout ratio of 50-60% which is lower than MTU’s prior dividend payout ratio of 70% given the higher capital intensity of the combined entity.

Key risks: Competition, integration, forecast Competition: VOC faces competition from larger operators Telstra (TLS), Optus and TPG Telecom (TPM) (and Spark New Zealand (SPK), Vodafone NZ in NZ) who we believe have stronger competitive positions given greater scale and ability to leverage mobile infrastructure ownership (apart from TPM). Over time, it will likely face increased competition in the Consumer segment from new entrants as the NBN rollout reaches greater scale. However we note that VOC: (1) has the lowest market share among its key competitors; and (2) is not facing a material increase in wholesale input costs (vs. competitors) with the migration to the NBN.

M&A integration/execution risk: While both have a strong track record of integrating acquisitions, combining VOC/MTU soon after VOC’s acquisition of AMM will likely to be challenging. There is a risk that synergies from the merger may not be achieved.

Valuation: 12-month target price of A$8.50 Our 12-month target price of A$8.50 is based on a blended average of:

DCF valuation: Our DCF of A$8.30 is based on: (1) WACC 9.0%; and (2) terminal growth rate (TGR) 2.5%.

EV/EBIT valuation: Our EV/EBIT based valuation is A$8.65 is based on an EV/EBIT multiple of 15X on FY17E earnings. Our multiple of 15X compares with the average of 13X for domestic peers and 16X for high growth international challengers.

Our 12-month target price of A$8.50 implies a FY16E/FY17E/FY18E P/E of 27X/21X/18X and dividend yield of 1.8%/2.0%/2.8%.

Goldman Sachs Global Investment Research 5 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Company strategy and profile

Company background Vocus Communications Vocus is a telecommunications company offering fibre, ethernet and internet services across ANZ. Founded in Australia in 2008 by James Spenceley as a voice and internet services provider, it has since expanded its range of products and acquired a number of data centres and fibre assets in ANZ, now owning national intracity infrastructure in Australia. Vocus has also invested in international submarine cable capacity that connects ANZ with Asia and the USA. It listed on the ASX in December 2014.

M2 Group The M2 Group (MTU) is a retail and wholesale provider of telco (broadband, voice, and mobile), utility and insurance services to Consumer and SMB customers. MTU was founded in 1999 by Vaughan Bowen and listed on the ASX in October 2004. Like VOC, MTU has also grown its business acquisitively, investing in a range of challenger brands to expand its services; notable acquisitions include Commander, Primus, Dodo and CallPlus. MTU delivers its fixed line and mobile products through reseller agreements with TLS and Optus. Both wholesale contracts are due for renewal in July 2016.

Merged group The combination of Vocus Communications and M2 Group (VOC) creates a full-service, vertically integrated ANZ telco provider. VOC offers full internet coverage across all Points of Interconnect (POI) in Australia’s NBN and NZ’s UFB and owns 1,791km of metro fibre, more than 3,647 on-net buildings in Australia, as well as 4,500km of NZ fibre.

Exhibit 1: The Vocus brand will operate in the Corporate & Government and Wholesale segments, while MTU’s brands will operate in the Consumer & SMB segments. VOC combined trans-Tasman portfolio of brands

Source: Company data.

Goldman Sachs Global Investment Research 6 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 2: VOC’s revenue is: (1) well diversified across products; (2) is evenly split across Consumer and Business & Wholesale; and (3) has a significant contribution from NZ VOC FY15 pro-forma revenue distribution – Product, Segment, Geography

Revenue by Product Revenue by Segment Revenue by Geography

Other, 7% Other, 1% NZ, 18% Energy, 9%

Voice, 34% Mobile, 6%

Internet, Consumer, Business & 5% 51% Wholesale, 49% Data Centres, 3%

Fibre & Ethernet, 10% Australia, 81% Broadband, 27%

Source: Company data.

Product Overview VOC operates a portfolio of businesses that cater for consumers, corporates/government and wholesale. Having now merged with MTU, it offers:

 Retail fixed broadband/voice, mobile, energy and insurance;

 Corporate/wholesale internet and IP voice;

 Data centres and cloud services;

 Dark fibre, Ethernet, IP WAN services;

 Domestic and international bandwidth.

We outline VOC’s key product sets in Exhibit 3 and 4 below.

Goldman Sachs Global Investment Research 7 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 3: Vocus current products

Product Suite Description

Data Dark Fibre A point-to-point connection, with virtually unlimited bandwidth. Raw fibre pairs Networks leased to customers, who then light the fibre using their network gear. Ethernet & A point-to-point or multipoint network that connects domestic and international Ethernet Multipoint locations. Offered on a shared or dedicated basis, at various speeds IP WAN A full service network offering (Ethernet/ADSL/NBN, Data centres, Software) Cloud Connect Dedicated bandwidth to Australias top public clouds (AWS, Microsoft Azure)

Internet Internet Express Fibre internet offered to Vocus' on-net buildings Business Internet High performance, carrier grade internet IP Transit Delivers internet access and transit on Vocus IP network DDOS Protection Protection against Distributed Denial of Services

Unified IP TEL IP based voice services Comms SIP Trunks Unified Comms delivered to customers equipped with SIP based exchanges Cloud Collaboration Telephony, Video Conferencing, Messaging, Presence and Mobility applications

Cloud Cloud Compute A private, shared cloud platform, available from multiple sites across Australia Backup & Archive Secure, off-site server hosting backup and archiving Disaster Recovery Secondary (separate) locations to allow business continuity

Data Provides colocation services - space, power and cooling suitable to house and Centres power customers' storage and network infrastructure.

Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 4: M2 current products

Product Suite Description

Consumer Broadband Offers ADSL2+, NBN, UFB, dial-up and some fibre services Voice Fixed line voice, NBN home phones, VoIP through Telstra/NBN (fixed) Mobile SIM-only mobile plans through Optus (mobile) network TV Subscription Television services via Fetch TV Energy Retails electricity in VIC/NSW/SA/QLD and gas in VIC/NSW Insurance Car, Home, Contents and Travel insurance

Business Broadband Offers ADSL2+, NBN, and EFM broadband through the Telstra/NBN networks Voice Fixed line VoIP, SIP Trunking through Telstra/NBN (fixed) Mobile SIM-only mobile plans through Optus (mobile) network Energy Retails electricity in VIC/NSW/SA

Wholesale M2 resells fixed and mobile voice and internet services, VoIP services and cloud communication services to junior reseller telecommunications providers

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8

March 10, 2016 Goldman Sachs Global Investment Research Infrastructure ownership VOC owns infrastructure assets across ANZ: (1) fibre infrastructure and data centres connect all major cities in ANZ; (2) 3,647 buildings connected with fibre in Australia; (3) full coverage of NBN/UFB POIs through its own fibre infrastructure and through TLS; and (4) submarine cable capacity links ANZ to Singapore (Sea-Me-We-3 cable) and the USA (Southern Cross cable through IRU).

Exhibit 5: In addition to its domestic ownership of data centres and on-net buildings in ANZ, VOC also holds stakes/ has IRUs for several international submarine cables VOC Infrastructure asset ownership

Internet infrastructure: . 510 DSL enabled exchanges across ANZ 189 on-net buildings . 100% coverage of NBN/UFB POIs in Australia/NZ

Darwin Voice infrastructure: . Carrier-grade voice services provided to Singapore 100% ANZ

USA

Sea-Me-We 3 Cable 215 on-net buildings . 39,000km total length . VOC 10% stake 1,791km Australian metro fibre 3,647 on-net buildings 19 data centres Southern Cross Cable Brisbane . 28,900km total length . VOC IRU agreement 114 on-net buildings Australia Singapore Cable 3 data centres (370m2) (Proposed) Newcastle . 4,600km total length 2 data centres (564m2) . VOC 50% stake; 50/50 JV Perth Sydney

252 on-net buildings Adelaide Auckland Melbourne 1,641 on-net buildings c.4,500km NZ intercity fibre 9 data centres (3,327m2) 3 data centres 740 on-net buildings 4 data centres (1,524m2) Wellington 422 on-net buildings 3 data centres (2,111m2) Christchurch Vocus CommunicationsLtd. (VOC.AX) Invercargill 1 data centre (128m2)

Source: Company data, Goldman Sachs Global Investment Research.

9

March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 6: Australian Infrastructure Assets Comparison of key fixed line infrastructure assets in Australia

Metro Buildings Intercity fibre Total (km) Locations connected NBN POIs covered International cable ownership fibre (km) (km) with fibre

Telstra 32,000 140,000 172,000 All capital cities 6,000+ 100% TGA (tendered Feb-13), Endeavour (2008), AJC (2001), Sea-Me-We- 3 (2000) Optus 9,600 8,600 18,200 All capital cities 3500+ 85%+ Sea-Me-We-3 (2000), Southern Cross (2000)

TPM 10,000 11,000 21,000 A,B,C,M,P,S 3,000+ 85%+ PPC-1 (2009), Southern Cross (IRU, 2000), Sea-US (IRU, scheduled completion 2016) Vocus 1,791 - 1,791 A,B,D,M,P,S 3,647 40-50% (VOC), 100% Southern Cross (IRU, 2000), Sea-Me-We-3 (2000), Australia- through TLS IRU Singapore (scheduled completion in 2017)

Nextgen 1,000 17,000 18,000 A,B,M,P,S 1,000+ 65% Australia-Singapore (scheduled completion in 2017)

A=Adelaide, B=Brisbane, C=Canberra, D=Darwin, H=Hobart, M=Melbourne, P=Perth, S=Sydney TPM includes fibre network expansion to connect VHA base stations in FY16-FY18

Source: Company data, ACCC, Goldman Sachs Global Investment Research.

Exhibit 7: VOC has expanded its fibre network footprint Exhibit 8: VOC now reaches over 3.6k on-net buildings through organic investments and M&A VOC – On-net buildings VOC – AU fibre network kms

2000 4000 3,647 1,791 1800 3,315 3500 1,606 1600 3000 1400 2500 1200

1000 2000

800 1500 585 600 1,048 1000 363 400 651 173 500 200 147 59 50 0 0 FY11 FY12 FY13 FY14 FY15 1H16 FY11 FY12 FY13 FY14 FY15 1H16

Source: Company data. Source: Company data.

NBN/UFB capability:

 NBN & TLS IRU: VOC has a 15-year Indefeasible Right of Use (IRU) agreement with TLS, which provides redundant access to all 121 NBN Points of Interconnect (POI). When signed in FY15, the IRU had estimated capacity for the subsequent 5/6 years.

 NBN & VOC Fibre: We estimate that VOC’s fibre network covers c.40-50% of the NBN POIs. In the longer term, we expect VOC will invest to increase its coverage of the NBN POIs.

 UFB: VOC has access to 100% of UFB POIs in NZ. When VOC acquired FX Networks in 2014, its network connected 26 of 33 UFB candidate areas.

Goldman Sachs Global Investment Research 10 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 9: VOC has access to all POIs for the NBN/UFB in Australia/NZ. In Australia, it accesses the POIs through its own fibre infrastructure and TLS fibre VOC NBN/UFB network distribution process

NBN M2 Telstra IRU NBN Core POI Network Vocus Fibre Vocus Internet Australian Premise Internet

Vocus Internet UFB Vocus NZ Fibre UFB Core POI Network

New Zealand Premise

Source: Company data, Goldman Sachs Global Investment Research.

Extensive distribution network VOC has acquired an extensive distribution network following the consolidation of MTU and AMM:  MTU: Sales force includes: (1) Commander-branded national dealer network with c.100 dealers with over 200 sales people; (2) 2600+ inbound sales and contact centre; (3) 70+ Dodo kiosks.  AMM: AMM’s sales force added: (1) 3 wholesale; (2) 28 corporate; and (3) 9 channel sales personnel to VOC.

We note the key distribution networks of key competitors:  TLS: (1) c.90 Telstra Business Centers across Australia; (2) direct and contact centre sales consultants; and (3) c.750 ICT partners; (4) c.300 retail stores.  Optus: (1) 50 dedicated Optus Business dealers; (2) business specialists in c. 270 retail stores; and (3) over 100 sales consultants.

Exhibit 10: MTU has a strong sales force and an extensive distribution network MTU’s distribution network details

Segment Key channel to market Consumer 2,600+ strong inbound sales and contact centre

70+ kiosk locations across Victoria, New South Wales, Queensland and South Australia

Small & Medium sized 210+ sales people comprising of a national dealer network in Business Australia and direct sales team across ANZ

Corporate & 400+ channel partners in ANZ Government Direct sales team across ANZ

Wholesale Direct sales teams aross ANZ

Source: Company data.

Goldman Sachs Global Investment Research 11 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Outlook and key stock drivers

Building blocks in place to win share across Consumer & Corporate In our view, VOC is well placed to continue to win market share across both the Consumer and Corporate segments. We see the following drivers:

Large addressable market: We estimate VOC’s total addressable market consists of: (1) Australian A$18bn fixed line market comprising Corporate A$11bn and Consumer A$7bn; (2) Australian retail energy market A$17bn; and (3) NZ fixed line market of NZ$3bn.

Low market share: We estimate VOC/MTU has low market share: (1) 6% in the Australian fixed line Consumer market; (2) 7% in Corporate market; (3) 1% in the retail energy market; and (4) c.9% share NZ fixed line market.

Exhibit 11: VOC has low market share across its addressable markets FY15E VOC market share (A$mn)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

VOC - 6% share Fixed line - Consumer

Vocus VOC - 7% share Fixed line - Corporate Total market

Energy - Retail VOC - 1% share

Source: Company data, Goldman Sachs Global Investment Research.

Improved competitive positioning following consolidation: We believe VOC has a stronger competitive positioning following the recent consolidation of VOC, AMM and MTU assets: (1) national fibre network; (2) national distribution assets; and (3) increased scale.

Low cannibalization risk: We believe VOC has lower risk of revenue/earnings cannibalization compared with its competitors: (1) in Corporate, VOC is benefitting from secular demand for data and has limited legacy products to be cannibalized; (2) in Consumer we believe VOC has lower risk of margin compression given it is already operating on a reseller model.

Corporate: Infrastructure ownership, secular demand for data, strong economics We expect VOC is well placed to benefit from:

 Secular demand for high bandwidth products: Cisco is forecasting ANZ traffic to grow at a +22% CAGR through to 2019 (Exhibit 12), driven by: (1) Mobile (42%); (2) Fixed (22%) and Managed IP (15%). We highlight three key trends that we believe are driving this growth: (1) proliferation of data-intensive devices driving mobile data

Goldman Sachs Global Investment Research 12 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

traffic; (2) ongoing adoption of cloud computing; and (3) consumption of OTT video driving fixed. We expect telco infrastructure operators to continue to benefit from these secular trends. While these trends are not new, we believe they will continue to drive demand for VOC’s high bandwidth products.

 Increasing network scale with attractive economics: VOC now has a national fibre network footprint following the AMM acquisition (implemented July-15). We also believe VOC will continue to invest to expand its fibre network with capex driven by customer demand with a targeted 3-year payback. VOC’s Corporate gross margins are currently c.60% and we believe it will likely improve over time as it benefits from greater network scale. We estimate every ±1% change in VOC’s market share in the Corporate market equates to: (1) ±c.A$110mn in revenues; and (2) ±c.A$60-70mn in EBITDA.

Exhibit 12: Secular growth in data traffic to drive demand Exhibit 13: Given its network ownership, VOC’s for bandwidth infrastructure services Corporate margins are superior to that of the Consumer ANZ traffic growth business, which are on reseller margins Incremental impact of +1% in market share on FY17E EBITDA, NPAT (A$mn)

ANZ Traffic 120 70% (Petabytes/month) Incremental revenues Incremental gross margin Gross margin (%) 2000 60% ANZ IP Traffic 2014-2019 100 Growth CAGR 1642 Mobile 50% Mobile: 41.4% 192 5.6X 80 1500 Fixed internet: 21.6% 1382 Managed IP: 15.1% Managed IP 219 2.0X 40% Total Traffic 22.1% 1141 60 30% 1000 940 774 40 Fixed internet 20% 605 2.7X 1231 20 500 10%

0 0% Consumer Corporate

0 2014 2015 2016 2017 2018 2019

Source: Cisco, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

 Improved sales distribution: VOC now has increased its sales capability following the consolidation of AMM/MTU. This includes sales of fibre internet products into SMB segments in on-net buildings. In the following section we further explore the potential revenue synergies from this opportunity.

 Improved industry structure: Over the past three years, the Corporate market has consolidated from 6 to 4 players. In the medium to longer term, this should be more supportive of a rational competitive environment. We note both incumbents, TLS and Optus, are seeing a significant degree of price competition from the smaller players, TPM and VOC. While we believe VOC (and TPM) will likely find it harder to compete in the large Corporate/Enterprise space, we believe they can win share in the SMB and small/medium corporates given: (1) both TLS and Optus’ do not directly target the dark fibre market in favour of offering broader managed telco services; (2) both TLS/Optus have legacy revenue streams to protect; (3) VOC has a newer, modern fibre network; and (4) VOC generally seeks to price its products at c.15% discount to TLS while at a c.15% premium to TPM.

Goldman Sachs Global Investment Research 13 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 14: VOC, AMM, MTU have increased share in the Exhibit 15: We expect VOC/TPM to continue to win Corporate market in the past 10 years modest share away from TLS and Optus Combined VOC, AMM, MTU Corporate revenues Australian Corporate market – Market share

Revenue Market Share (%) Vocus Amcom MTU Corporate Market Share Market (A$mn) Share (%) 70% 1000 10%

60% Telstra

800 8% 50%

600 6% 40%

30% 400 4%

20% Optus

200 2% 10% TPM Vocus Other 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 0 0% FY16E FY17E FY18E FY19E FY20E FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Consumer: Strong industry growth, NBN opportunity Industry growth: We expect strong industry growth to continue, driven by: (1) acceleration in the rollout of NBN driving access to households who could not access fixed broadband previously (the Government/NBN has identified 1.8m underserved households mainly in regional Australia); and (2) overall household growth; and (3) increasing demand for data driven by video.

Exhibit 16: We expect continued strong growth in the Exhibit 17: The NBN rollout is set to accelerate which will fixed broadband market driven by household growth, continue to support industry growth as the NBN reaches NBN and strong demand for data underserved areas Fixed broadband subs (000s), penetration (%) NBN fixed line activations (000s)

Fixed BB subs (000s) Household penetration (%) NBN activations Household penetration (%) Subs BB penetration (000s) NBN fixed line activations NBN penetration 9,000 90% 4,000 60%

8,000 80% 3,500 50% 7,000 70% 3,000

6,000 60% 40% 2,500

5,000 50%

2,000 30% 4,000 40%

1,500 3,000 30% 20%

1,000 2,000 20%

10% 1,000 10% 500

0 0% 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 0 0% 2015E 2016E 2017E 2018E 2010A 2011A 2012A 2013A 2014A

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

NBN opportunity: We believe that the NBN rollout particularly in regional Australia provides an opportunity for TLS’ competitors to win share. While TLS is holding over 50% share in NBN areas, we believe it will lose share in regional areas where we estimate it currently has c.65% market share.

Goldman Sachs Global Investment Research 14 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Market share wins: We believe VOC will likely continue to win modest share going forward given: (1) NBN will likely drive some increased churn which will benefit operators with lower market share; (2) VOC has a differentiated product offering with a dual brand strategy (iPrimus targets higher segments and Dodo targets value end with c.20-40% discount to incumbents) and is the only operator offering bundled energy/insurance products; (3) improved retail distribution with the recent investments in its Dodo Kiosks; and (4) improved infrastructure access (TLS NBN POI backhaul deal, VOC infrastructure) that enables VOC to improve its product offering (increased bandwidth) and increase its addressable market.

Exhibit 18: We expect VOC’s share of NBN areas will Exhibit 19: We expect VOC will continue to win modest improve as it leverages the TLS NBN backhaul deal and share in broadband places greater focus in NBN areas as the rollout increases VOC broadband subs (000s), share 1H16 Broadband market share

TLS Optus IIN TPM MTU Broadband Subs (000s) Market share (%) MTU subs Market share 800 10% 70%

9% 700 60% 8% 600 7% 50% 500 6%

40% 400 5%

4% 30% 300

3% 200 20% 2%

100 1% 10%

0 0% 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E 0% On-net Off-net NBN

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Consumer margins likely to be stable: Given VOC is moving its current reseller model from TLS wholesale to NBN, we expect the impact on VOC Consumer margins will likely be largely unchanged (ADSL2+ compared with NBN entry level). If VOC can successfully upsell to higher speed plans, we believe it could drive higher gross margins over time.

Exhibit 20: VOC/MTU pricing remains below most Exhibit 21: We expect the impact of NBN migration on competitors VOC Consumer margins to be largely unchanged Fixed Bundled ARPU (A$/sub/month) ARPU (ex GST), Gross Profit/sub (A$/sub/m)

110 100.0 50% ARPU ex GST Gross profit Gross margin 100 90.0 45%

90 80.0 40% 70.0 35% 80 60.0 30% 70 50.0 25% 60 40.0 20%

50 30.0 15%

40 20.0 10%

30 10.0 5%

0.0 0% 20 ADSL2+ NBN 12/1 NBN 25/5 NBN 100/40 TLS Optus iiNet VOC/MTU TPM unlmited Unlmiited Unlimited Unlmited

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 15 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Synergies: We see upside from potential revenue synergies

Cost synergies of A$40mn look conservative compared with recent mergers MTU/VOC expects costs synergies of A$40mn (with A$20mn of one-off costs) to be realised by the end of FY18E:

 Network synergies: Savings from network optimisation and leveraging existing infrastructure assets. In addition, we expect VOC/MTU will be in a stronger position to negotiate improved terms in its fixed line wholesale agreement with TLS given: (1) increased potential to leverage its own infrastructure assets; and (2) c.10% reduction in regulated access rates implemented by the ACCC in November 2015.

 Non-network synergies: Savings from duplicated company costs, rationalisation of staff and SG&A costs.

We estimate A$40mn in synergies represents c.4% of the combined group’s FY15 total cost base. In our view this looks conservative, particularly compared with synergies for similar domestic transactions.

Exhibit 22: We believe that the A$40mn in cost synergies identified by management look conservative Cost synergies as % of combined (acquirer + target) cost base

Cost synergies (as a % combined cost base)

14%

12.0% 12%

10%

7.7% 8% 6.5%

6%

3.6% 3.9% 4%

2%

0% MTU/IIN VOC/MTU TPM/AAPT VOC/AMM TPM/PIPE (FY15, proposed) (FY16) (FY14) (FY15) (FY10)

Source: Company data, Goldman Sachs Global Investment Research.

Revenue synergies: We estimate a potential for A$100mn revenue synergies Reducing Consumer churn: A key focus for management will be to reduce MTU’s fixed line broadband churn rate of c.2.8%/month which is materially above the industry average of c.1.5%/month. In our view, the key drivers of MTU’s higher churn are: (1) MTU (particularly Dodo’s) broadband connection has a relatively lower quality (higher contention) given limited backhaul capacity; (2) perception of weaker customer service; (3) aggressive selling strategies including lower price transparency and upsell of additional products; and (4) social demographic mix (e.g. higher proportion of renters, etc.).

We believe VOC will seek to address the high churn largely by improving the capacity of its broadband products: (1) targeted migration of c.3-5% of high bandwidth users who consume 15-20% of all capacity to “on-net” (away from TLS) by leveraging its own DSLAM

Goldman Sachs Global Investment Research 16 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

network and fibre backhaul; and (2) utilisation of the TLS NBN backhaul deal which provides significantly more capacity (vs. on-net) for NBN customers. In our view while this will likely improve churn over time, we expect that churn rates will be above industry average given the other reasons mentioned above.

Our sensitivity analysis suggests that if VOC can reduce Consumer churn to 2% by FY18E, and maintain a similar number of annual gross adds, this could result in an uplift of over 100k subscribers, which would deliver an incremental A$100mn in revenue.

Exhibit 23: MTU broadband churn of 2.8%/month is Exhibit 24: MTU’s TIO complaints are well above the significantly higher than its competitors average of its peers FY15 Broadband churn (%/month) TIO Internet complaints per 10k Internet subs Jul-14 – Jun-15

No. Internet complaints per 10k 3.0% Internet subs

60 2.5%

50

2.0% 40

1.5% 30

1.0% 20

0.5% 10

0.0% 0 TLS IIN TPM MTU iiNet TPG Telstra Optus M2

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, TIO

Exhibit 25: TIO complaints across Dodo/Primus are Exhibit 26: If VOC/MTU can successfully lower churn, we dominated by faults and customer service believe this could deliver material revenue synergies TIO Internet complaints by type Jul-14 – Jun-15 Scenario analysis – revenue synergies from lower churn

Dodo Primus TPM VOC - Consumer Broadband FY14 FY15 FY16E FY17E FY18E FY18E 30.0% Base Case - Churn 2.8% Gross Adds (000s) 182 174 201 227 222 227 25.0% Annual Churn (000s) 118 139 151 168 188 199 Net Adds (000s) 64 35 51 60 34 28 Churn rate (%/m) 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 20.0% Subscribers (000s) 414 449 500 559 593 621 Scenario analysis - Lower churn 15.0% Gross Adds (assume unchanged) 182 174 201 227 222 227 Annual Churn 118 139 140 138 141 161 Net Adds 64 35 61 90 80 67 10.0% Churn rate 2.8% 2.8% 2.6% 2.3% 2.0% 2.0%

Subscribers 414 449 500 589 669 736 5.0% vs. base case 0 0 11 30 76 115

Incremental revenue p.a. (A$mn) 20 53 96 0.0% Assuming bundled ARPU A$82 Note: ARPU A$82 is the current bundled ARPU

Source: TIO Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 17 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Increases Corporate sales in on-net buildings: We believe VOC has 1-2 key customers in its on-net buildings which generally purchase dark fibre products (we estimate c.A$2.5k per month). Given its limited sales capabilities to date, we believe that VOC has struggled to materially increase the number of customers per on-net building. However, going forward we believe it could leverage MTU’s distribution network and sales force to increase products sales, particularly to SMB customers in each of the on-net buildings.

An example of this is MTU selling Commander branded 400Mbps fibre internet services for A$400/m in VOC on-net buildings. In our view, this is a very competitive product which compares with: (1) TPM’s unlimited Fibre400 product; and (2) comparable incumbent offerings which could be over A$2000/m. Furthermore, given the product leverages existing fibre infrastructure, the incremental margins are likely to be extremely high (i.e. >70%).

Exhibit 27: We estimate that if VOC could increase its market share to 5-10%, this could deliver an incremental A$30-A$60mn of revenues Scenario analysis – Increased product sales into on-net buildings

VOC - Commander Rapid Fibre

Assumptions VOC On-net buildings 3,647 Average Tenants/building 30 Total addresable market (000s) 109

Commander Rapid Fibre ARPU $400 Earnings Impact Market Share Subs (000s) Subs/building Revenue EBITDA margin EBITDA % of FY17 EBITDA 2.0% 2.2 0.6 11 70% 7 2% 5.0% 5.5 1.5 26 70% 18 4% 10.0% 10.9 3.0 53 70% 37 9% Note: The above assumptions are based on Vocus’ disclosure and advertised pricing. We assume 30 tenants per building.

Source: Company data, Goldman Sachs Global Investment Research.

We expect VOC will continue to pursue M&A opportunities Both Vocus and MTU have actively participated in industry consolidation in the past 10 years:

 MTU: We estimate MTU has invested A$0.8bn to acquire 19 businesses which have contributed c.A$180mn in EBITDA.

 VOC: We estimate VOC has invested A$0.8bn to acquire 9 businesses (prior to MTU) which have contributed EBITDA of c.A$75mn EBITDA.

We expect VOC will continue to explore M&A opportunities to increase its scale and capabilities:

 Infrastructure: In our view, the missing link in VOC’s infrastructure assets is intercapital fibre in Australia. All of its key infrastructure competitors (TLS, Optus, and TPM) own both metro fibre and intercapital fibre. We note media reports (AFR, March 1) have suggested VOC could be a potential acquirer of Nextgen, which owns significant intercapital fibre assets.

 Energy: MTU has previously stated it could seek M&A opportunities to increase its scale in the energy sector. We note it previously participated in the bidding process for Lumo Energy in 2014 (Lumo was acquired by Snowy Hydro for A$605mn).

 Mobile: We also think VOC could explore opportunities to strengthen its scale, capabilities and product offering in both Australian and NZ mobile markets. Longer term, we believe a competitive mobile offering will be increasingly important, particularly against converged competitors TLS and Optus.

Goldman Sachs Global Investment Research 18 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

 Corporate Telecoms: VOC has invested A$15.6mn to gain a 14.5% equity stake in Macquarie Telecom (April-15). Macquarie Telecom is a full service managed hosting and telco provider to the Corporate market.

Exhibit 28: VOC has acquired 9 businesses prior to MTU, contributing c.A$75mn in EBITDA Historical M&A

Vocus Acquisition History Purchase Estimated Pre-synergy Asset Date Asset Description Price ($mn) EBITDA (A$mn) multiple (X) E3 Networks Data Centres Nov-10 Data centres in Sydney/Melbourne 5.9 '$1.5mn PBT' 3.9 (for PBT) Perth iX May-11 Data centre in Perth 7.2 1.5 4.8 Digital River Networks May-11 Fibre network in Sydney/Melbourne 4.0 'accretive' n.a. Maxnet May-12 Data centres in Auckland/Christchurch, cloud services 9.5 2.0 4.8 Ipera Communications Jan-13 Fibre network and data centres in Newcastle 10.8 2.4 4.5 FX Networks Jul-14 Fibre network in New Zealand 115.8 14 8.3 Bentley Data Centre Aug-14 Data centre in Perth 11.7 2.0 5.9 EDC Feb-15 Data centres in Sydney/Melbourne 23.5 4.7 5.0 Amcom Jul-15 Corporate telco with fibre network in Australia 667.8 46.7 14.3 M2 Group Feb-16 Retail telco, utility and insurance provider 2,420.9 256.0 9.5 Total 3,277.1 329.3

Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 29: MTU acquired 19 businesses, contributing c.A$180mn in EBITDA Historical M&A

M2 Group Acquisition History Purchase Estimated Pre-synergy Asset Date Asset Description Price ($mn) EBITDA ($mn) multiple (X) Protel Communications Feb-05 Telco services provider to SMB 2.0 n.a. n.a. Wholesale Communications Group May-07 Telco wholesaler 3.3 0.9 3.7 (for NPAT) Orion Telecommunications Jun-07 Telco services provider to Consumer/SMB 21.8 n.a. n.a. Tenex Telecommunications Jul-07 Telco services provider to SMB 0.5 0.3 1.75 (for NPAT) Unitel Australia Feb-08 Telco wholesaler 10.0 n.a. n.a. People Telecom Dec-08 Telco services provider to Consumer/SMB 14.0 n.a. n.a. Commander Communications Jun-09 Telco services provider to SMB 19.0 13.4 1.4 Clever Communications Apr-10 Telco services provider to SMB 5.0 2.3 2.2 Bell Networks Voice & Data Jun-10 Telco services provider to SMB 4.0 2.0 2.0 Black and White Group Nov-10 Mobile service provider in New Zealand n.d. 2.0 n.a. Clear Telecoms Feb-11 Telco services provider to SMB 24.5 8.2 3.0 AUSTAR mobile assets Feb-11 Mobile service provider 2.0 1.3 1.5 Edirect Apr-11 Mobile service provider 5.0 2.0 2.5 Flextalk Jan-12 Telco services provider to SMB 3.5 1.2 2.9 Time Group Feb-12 Telco services provider to SMB 18.4 6.3 2.9 Primus Telecom Apr-12 Telco services provider to Consumer/SMB, fibre network 192.0 45.0 4.3 Dodo/Eftel May-13 Telco/utilities services provider to Consumer/SMB 242.0 50.0 4.8 Call Plus/2 Talk Apr-15 Telco service provider to Consumer/SMB in New Zealand 245.0 45.0 5.4 Total 812 180

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 19 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Industry overview

Australian telco market: A$38bn revenues, FY10-FY15 CAGR +2%

Exhibit 30: We estimate the size of the total Australian Exhibit 31: TLS and Optus dominate the market with telco market is A$38bn. The market has grown at FY10- c.80% market share FY15 CAGR +2%, FY05-FY15 CAGR +2.7% FY15 market share of revenues (%) Total Australian telco revenues (A$mn)

Domestic telco revenues (A$mn) Fixed line Other, 2% 45.0 10.0% VOC, 4% TPM, 6% 40.0 8.0%

6.0% 35.0 VHA, 9% 4.0% 30.0

2.0% 25.0 0.0% 20.0 Telstra, 57% -2.0% Optus, 22%

15.0 -4.0%

10.0 -6.0%

5.0 -8.0%

0.0 -10.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

A$15bn Corporate market: We estimate VOC has c.7% share of A$11bn fixed line segment

Exhibit 32: We estimate the size of the Corporate Exhibit 33: The total Corporate market (including mobile) (including SMB) market is A$15bn, with fixed line is dominated by the incumbents TLS and Optus (including NAS) A$11bn and mobile over A$4bn FY15 Corporate market shares FY15 Corporate market size

NextGen, 2% MAQ, 1% Vodafone, 2% VOC (inc MTU, AMM), 5%

TPM, 6%

NAS, $3.0bn

SMB, Enterprise Fixed (PSTN, Consumer, & Govt, $15.0bn BB, Data & $23.0bn Mobile, IP), $7.7bn Optus, 20% $4.4bn

TLS, 65%

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 20 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 34: While legacy revenues have been under Exhibit 35: TLS and Optus also dominate the fixed line pressure, growth in IP access and NAS services have Corporate sector revenues driven growth in fixed line revenues across the Corporate FY15 Fixed line Corporate market share (%) sector Corporate sector revenues (A$mn)

12,000 Other (e.g. ISDN, broadband) NAS 6.0% Data & IP Fixed voice NextGen, 2% MAQ, 2% Growth (% yoy)

10,000 4.0% VOC (inc AMM), 7%

8,000 2.0% TPM, 8%

6,000 0.0%

4,000 -2.0%

Optus, 19%

2,000 -4.0% TLS, 62%

0 -6.0% FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

A$23bn Consumer market: VOC has c.7% share of A$7bn fixed line segment

Exhibit 36: We estimate the size of the Consumer market Exhibit 37: TLS, TPM and Optus together hold c.90% of is A$23bn with fixed line A$7.2bn and Mobile A$15.7bn the total fixed line Consumer market FY15 Consumer market size FY15 fixed line Consumer market shares

Other, 4% VOC, 7%

Mobile, $15.7bn Optus, 16%

SMB, Enterprise Consumer, & Govt, $15bn $23bn Fixed, $7.2bn TLS, 52%

TPM, 21%

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 21 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 38: Fixed broadband industry growth continues Exhibit 39: TLS has c.47% market share, TPM (and IIN) to be strong, driven by the NBN, household growth and 27%, Optus 15%, VOC 7.5%. In recent periods, TLS and demand for fixed line data drives TPM have captured the majority of growth Fixed line broadband industry net adds (000s), penetration Fixed line broadband net adds (000s) (%)

Net adds (000s) Household penetration (%) 121 Industry net adds BB penetration 101 1,400 90% TLS 87 109 75 80% 1,200 54 70% 47 TPM 38 1,000 41 60% 36

24 1H16 800 50% 12 2H15 MTU 27 1H15 31 600 40% 38 2H14 1H14 30% 7 14 400 IIN 25 1H16E for 20% 24 TPM, IIN 16 200 10% 4 37 Optus -1 0 0% 19 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E -14

-40-200 20406080100120140

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Energy: A$17bn retail market, strategically important for MTU

Exhibit 40: The majority of VOC energy business is in the Exhibit 41: Victoria and South Australia are the only deregulated Victorian market. However NSW looms as a states offering full retail contestability and deregulated significant opportunity given the market size and stage prices of deregulation Retail energy market reform in Australia FY15 Australian consumer energy markets

Market not fully contestable, regulated prices Full retail contestability, regulated prices Full retail contestability, deregulated prices

South East Queensland Electricity

Gas

Regional Queensland Electricity

Gas

Victoria Electricity

Gas

New South Wales Electricity

Gas

ACT Electricity

Gas

South Australia Electricity

Note: Green denotes deregulation while red the converse. Gas

Tasmania Electricity

No gas market until 2007 Gas

2001 2003 2005 2007 2009 2011 2013 2015

Source: Goldman Sachs Global Investment Research, Australian Energy Market Source: Australian Energy Regulator Commission, Australian Energy Regulator

Goldman Sachs Global Investment Research 22 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 42: We estimate the Australian retail electricity Exhibit 43: We also estimate the Australian retail gas market to be worth A$14.2bn. VOC operates in the VIC, market to be worth A$3.2bn in size with VIC the largest NSW and SA markets market FY15 Australian retail electricity market size (A$) FY15 Australian retail gas market size (A$)

Other, Other, $0.1bn $0.8bn WA, $0.4bn

WA, $1.5bn NSW, $1.0bn

NSW, $5.3bn SA, $1.1bn SA, $0.4bn

QLD, $0.2bn QLD, $2.4bn

VIC, $1.1bn VIC, $3.0bn

Source: Goldman Sachs Global Investment Research, Australian Energy Market Source: Goldman Sachs Global Investment Research, Australian Energy Market Commission, Australian Energy Regulator Commission, Australian Energy Regulator

Exhibit 44: With Energy an incremental product offering Exhibit 45: .. and has the cheapest gas offer. These offers to its existing telecom offerings, Dodo has one of the should allow it to continue growing subscribers most competitive, electricity offers on the market… Relative monthly gas costs – VIC, no contract (A$/m, price at Relative monthly electricity costs - VIC, no contract (A$/m, March-16) price at March-16)

Relative monthly electricity contribution Relative monthly gas contribution VIC retailers, no contract, incl. conditional offers VIC retailers, no contract, incl. conditional offers

140 160

140

120

120

100

100

80 Next Business GloBird Powershop Dodo Red Alinta Energy Australia Click AGL Powerdirect Origin Momentum Sumo Diamond People Simple Hydro Pacific Lumo QEnergy 80 Dodo Origin Alinta Lumo AGL Momentum Red

Source: Goldman Sachs Global Investment Research, Victorian Energy Source: Goldman Sachs Global Investment Research, Victorian Energy Compare (https://compare.switchon.vic.gov.au/) Compare (https://compare.switchon.vic.gov.au/)

Goldman Sachs Global Investment Research 23 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

New Zealand Telecoms: Market beginning to grow again, dominated by SPK and Vodafone NZ

Exhibit 46: We estimate the NZ telecom market size to be Exhibit 47: We estimate fixed line (including SPK IT NZ$6bn. Revenues have begun to stabilize following a services) segment has A$3.2and mobile revenues to be number of years of decline (FY11-FY15 CAGR -2.5%) c.NZ$3bn NZ telco industry revenues (NZ$mn) FY15 NZ telco industry revenues

8.0

7.0

6.0

5.0 Mobile, $2.8bn Fixed, $3.2bn

4.0

3.0

2.0 2011 2012 2013 2014 2015

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 48: The NZ market is dominated by SPK and Exhibit 49: In fixed line broadband VOC (CallPlus) holds Vodafone both holding nearly c.90% market share c.13% market share FY15 NZ Telco industry market share 2015 Broadband subscriber market share

MTU (Call Plus + FX), 5%

2Degrees , 7% Vodafone, 28%

Vodafone, 31%

Spark, 46% Callplus, 13%

Spark, 57%

Others, 10% TrustPower, 3%

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 24 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Financial forecasts

Profit and Loss In our view, VOC has a very strong track record of growth, driven both organically, and through multiple accretive acquisitions. We expect:

Revenue: FY15-FY18E growth of +140% p.a., driven by: (1) the recently completed acquisitions of MTU and AMM; (2) strong growth in corporate as VOC benefits from the demand in fibre products and modest share wins; (3) a pick up in broadband net adds driving growth in consumer.

EBITDA: FY15-FY18E CAGR of +112% as VOC benefits from the MTU and AMM synergies and operational leverage as it increases network utilization.

EPS (ex abnormals, amortization of acquired subs): FY15-FY18E CAGR of +41%, given strong EBITDA growth, but offset by the significant equity issues in FY16 from MTU acquisition (VOC issues c.130% of its share base in this acquisition). We note our underlying EPS forecasts exclude the non-cash amortization of acquired subscriber bases.

Exhibit 50: We forecast strong FY15-FY18E growth, driven both organically and from the MTU and AMM acquisitions VOC – Financial Forecasts

FY12-FY15 FY15-FY18E FY12 FY13 FY14 FY15 FY16E FY17E FY18E CAGR CAGR Profit and Loss (A$mn) Corporate 45 66 92 149 539 882 938 Consumer 0 0 0 0 253 793 863 Callplus 0 0 0 0 88 259 262 Total Revenue 45 66 92 149 879 1934 2063 49% 140%

Gross Margin 27 40 55 84 408 799 870 46% 118%

Employee costs 8 13 15 26 108 181 186 Other expenses 4 5 7 8 79 189 196 Total SG&A costs 11 19 22 33 187 370 382 44% 125%

EBITDA 16 21 33 52 223 431 490 48% 112% EBIT 10 8 22 33 174 349 405 NPAT - (ex abnormals, amortization of acquired sub bases) 7.8 5.1 13.6 18.1 105.1 216.3 258.3 33% 142%

EPS (¢ps) - (ex abnormals, amortization of acquired sub bases) 12.2 6.6 16.1 17.2 31.4 40.7 48.6 12% 41% EPS (¢ps) - reported 12.2 6.6 15.3 18.8 20.6 28.5 39.9

DPS (¢ps) 0.0 1.0 1.8 8.3 15.6 17.0 24.0 n.a 42% Payout 0% 15% 12% 44% 76% 60% 60%

Margins Gross margin 60.5% 60.2% 59.9% 56.7% 46.4% 41.3% 42.2% EBITDA margin 35.4% 32.3% 35.9% 34.6% 25.4% 22.3% 23.8%

Growth Rates Sales 47% 48% 38% 62% 490% 120% 7% EBITDA 67% 34% 54% 56% 332% 93% 14% NPAT -4% -34% 166% 34% 479% 106% 19% EPS -16% -46% 145% 7% 82% 30% 19%

Returns CROCI 11.6% 7.5% 15.9% 11.1% 7.0% 7.9% 8.5%

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 25 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 51: The MTU acquisition added significant Exhibit 52: In our forecasts, we assume VOC will exceed revenues to Vocus, with FY17E the first full year MTU their cost synergies target of A$40mn in FY19E revenues/earnings VOC – EBITDA (A$mn) VOC – Revenue (A$mn)

Revenue (A$mn) Callplus Consumer Corporate EBITDA (A$mn) Cost Synergies MTU Vocus EBITDA Margin 2500 600 40%

55 2000 500 35% 262 36 259 19 400 30% 1500 863 288 793 268 300 247 25% 1000 5 88 200 20% 84 253 500 882 938 100 202 15% 165 187 149 539 136 66 92 45 33 52 0 0 10% FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E FY19E

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Balance Sheet and Cash Flow We expect: (1) net Debt/EBITDA to fall from the current pro-forma 2.0X in FY15 in to 1.1X in FY18E; (2) dividend payout ratio of c.60% (although we note the company has yet to decide on payout ratio); and (3) capex/sales to fall from c.25% of revenues to c.8% post-merger given the incorporation of MTU’s asset light business model. We note capex associated with the TLS and Southern Cross IRU’s will commence in FY16, which are incremental to the group’s core capex.

Exhibit 53: We believe VOC remains in a strong financial position despite the significant acquisitions VOC – Balance sheet and cash flow

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

EBITDA 16.0 21.5 33.0 51.6 222.9 430.9 489.9

Net operating CF 11.9 14.9 30.6 42.6 135.9 296.8 343.8 Capex -11.8 -16.7 -24.2 -34.7 -102.1 -142.9 -148.8 FCF (pre dividends) 0.1 -1.8 6.4 7.9 33.8 153.9 195.0 Dividends 0.0 -0.3 -1.1 -2.2 -83.0 -90.4 -127.7 FCF (post dividends) 0.1 -2.1 5.3 5.7 -49.2 63.5 67.3

Net debt 33 57 5 105 624 561 494 Net debt/EBITDA (X) 2.1 2.6 0.2 2.0 2.8 1.3 1.0

Core 11.8 16.7 18.3 31.9 79.1 116.0 123.8 Telstra IRU 0.0 0.0 0.0 0.0 2.0 7.2 7.5 Southern Cross IRU 0.0 0.0 0.0 0.0 21.0 16.8 13.4 Other 0.0 0.0 5.9 2.8 0.0 2.9 4.1 Total Capex 11.8 16.7 24.2 34.7 102.1 142.9 148.8

Capex/sales 26.2% 25.1% 26.3% 23.3% 11.6% 7.4% 7.2%

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 26 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Valuation

We initiate with a 12-month price target of A$8.50 Our 12-month target price of A$8.50 is based on a blended average of: (1) our DCF; and (2) our FY17E EV/EBIT-based valuation. Our 12-month target price of A$8.50 implies a FY16E/FY17E/FY18E P/E of 27X/21X/18X and dividend yield of 1.8%/2.0%/2.8%.

We believe VOC’s business lends itself well to a DCF valuation given its long term recurring revenue model and infrastructure capital requirements. We also believe EV/EBIT is an appropriate valuation methodology given VOC’s ease of comparison with peers with different capital structures and levels of capital intensity.

Exhibit 54: We initiate with a 12-month price target of A$8.50 12 month price target

TP METHODOLOGY EV/EBIT methodology FY17 EBIT EV/EBIT Value $mn X $mn Enterprise value 349 15 5231 Net debt 635 Equity value 4596 Shares on issue 532 Equity value/share 8.65

DCF methodology DCF valuation 8.30

12 month Price Target (50/50 DCF, EV/EBIT) 8.50

Current share price 8.10 Upside/downside to PT 5% Total shareholder return (inc DPS yield) 7%

Source: Iress, Goldman Sachs Global Investment Research.

Exhibit 55: Implied multiples

At current price (A$8.1) At target price (A$8.5) Growth (% yoy) FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19

EV/Sales 5.6 2.6 2.4 2.3 5.9 2.7 2.5 2.4 Sales 490% 120% 7% 6% EV/EBITDA 22.1 11.4 10.1 9.1 23.1 11.9 10.5 9.4 EBITDA 332% 93% 14% 11% EV/EBIT 28.3 14.1 12.2 11.0 29.5 14.8 12.7 11.4 EBIT 421% 100% 16% 11% P/E 25.8 19.9 16.7 14.7 27.1 20.9 17.5 15.5 EPS 82% 30% 19% 13% Dividend yield 1.9%2.1%3.0%3.6%1.8%2.0%2.8%3.4% DPS 88% 9% 41% 21% FCF yield 0.8% 3.6% 4.5% 5.5% 0.7% 3.4% 4.3% 5.2% FCF ‐15% 355% 27% 21%

Source: Goldman Sachs Global Investment Research.

Methodologies used: DCF, EV/EBIT DCF: Our DCF valuation of A$8.30 assumes: (1) WACC of 9.0% (Rf 5.5%, MRP 5.0%, beta 0.95); and (2) TGR of 2.5% which is higher than ANZ telecom sector assumption of 1.5% given we believe VOC has higher long term growth prospects given its low market share.

Goldman Sachs Global Investment Research 27 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Exhibit 56: Our DCF valuation is A$8.30 Exhibit 57: DCF scenario analysis Discounted cash flow valuation (A$mn, A$share) DCF sensitivity to WACC and TGR

Cumulative NPV of Free Cash Flow 1,617 COST OF EQUITY CALCULATION Perpetuity Growth Rate NPV of Terminal Value 2,540 Risk free rate 5.5% Enterprise Value 4,156 Equity beta 0.95 8 1.5% 2.0% 2.5% 3.0% 3.5% Less: Net Debt Year End 2016 635 Equity premium 5.0% 8.0% $8.87 $9.47 $10.09 $10.89 $11.86 Equity Value 3,521 Cost of equity 10.3% WACC 8.5% $8.13 $8.56 $9.11 $9.73 $10.52 Shares on issue 532 9.0% $7.46 $7.83 $8.26 $8.80 $9.42 Equity value per share 6.60 Risk margin 0.5% Value of imputation credits 1.66 Cost of debt 6.0% 9.5% $6.85 $7.21 $7.58 $8.01 $8.50 DCF valuation including imputation credits 8.26 10.0% $6.36 $6.61 $6.97 $7.28 $7.71

WACC CALCULATION Cost of equity 10.3% Cost of debt 6.0% Tax rate 30.0% Cost of debt (after tax) 4.2% % equity 80.0% % debt 20.0% WACC 9.0%

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

EV/EBIT: Our EV/EBIT based valuation is A$8.65. We have applied a FY17E EV/EBIT multiple of 15X which compares with: (1) 13X domestic peers; and (2) 16X for global telco challengers. We believe VOC should trade towards the top end of its domestic peers’ range (8-15X), given its strong growth outlook.

Exhibit 58: Domestic peers currently trade at 13X. Given Exhibit 59: Higher growth international telco challengers its growth outlook, we believe VOC should trade at the trade at 16X EV/EBIT top end of the range of 8-15X FY17E EV/EBIT – Global telco challengers FY17E EV/EBIT – Domestic telcos

FY17 EV/EBIT (X) FY17 EV/EBIT (X) 16 20 33X

12 15

8 10

4 5

0 0 LVLT ILD VOC TPM CNU SPK TLS AYS VOC ZAYO TC1n TPM UTDI TALK

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Exhibit 60: Peer valuation comps

Mkt Cap. FY15-18E CAGR P/E EV/EBITDA EV/EBIT Dividend yield CROCI EBIT/Sales Capex/Sales Ticker US$mn Sales EBITDA EBIT EPS 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2017E 2017E

Vocus Communications VOC.AX 3,206 140.1% 111.8% 129.5% 41.3% 25.8 19.9 16.7 18.3 11.3 9.8 23.4 14.0 11.9 1.9% 2.1% 3.0% 7.6% 7.7% 8.4% 18.0% 7.4%

Domestic peers Telstra Corp Ltd TLS.AX 46,941 2.7% 2.8% 3.7% 3.6% 15.0 14.0 13.5 7.1 6.7 6.5 11.4 10.5 10.0 6.1% 6.2% 6.2% 11.1% 11.3% 11.3% 26.5% 14.8% TPG Telecom TPM.AX 6,155 30.5% 27.9% 32.2% 27.8% 26.6 21.2 17.7 13.2 11.1 9.7 18.5 14.9 12.6 1.6% 2.1% 2.5% 19.4% 16.1% 16.7% 25.5% 13.3% Spark New Zealand Ltd SPK.NZ 4,437 0.8% 2.5% 5.7% 3.7% 17.8 17.2 15.8 7.2 7.1 6.9 13.2 12.8 11.8 7.0% 7.0% 6.5% 8.9% 8.3% 8.4% 15.7% 11.0% Chorus CNU.NZ 1,042 2.3% 1.8% 4.3% 16.2% 14.5 11.3 10.7 7.0 6.7 6.7 15.6 13.8 13.5 5.1% 6.4% 7.1% 5.9% 5.9% 5.7% 28.6% 44.5% amaysim AYS.AX 232 16.8% 45.8% 48.9% 46.6% 16.1 11.2 9.7 10.0 6.9 6.2 11.1 7.6 6.7 4.4% 6.3% 7.2% 28.1% 26.5% 22.4% 13.3% 1.0% Mean 10.6% 16.1% 19.0% 19.6% 18.0 15.0 13.5 8.9 7.7 7.2 13.9 11.9 10.9 4.8% 5.6% 5.9% 14.7% 13.6% 12.9% 21.9% 16.9% Median 2.7% 2.8% 5.7% 16.2% 16.1 14.0 13.5 7.2 6.9 6.7 13.2 12.8 11.8 5.1% 6.3% 6.5% 11.1% 11.3% 11.3% 25.5% 13.3%

Global telco challengers Level 3 Communications LVLT 18,121 6.5% 13.4% 17.0% n.a. 16.2 26.4 23.6 10.6 9.2 8.0 19.5 16.2 13.5 0.0% 0.0% 0.0% 11.3% 11.9% 12.1% 18.1% 15.0% Iliad ILD.PA 13,802 5.1% 11.0% 16.0% 21.4% 30.5 24.7 21.8 8.8 7.9 7.3 18.2 15.6 13.9 2.3% 4.7% 9.3% 15.8% 14.7% 14.3% 17.5% 23.3% United Internet UTDI.DE 10,062 9.5% 12.8% 14.0% 14.5% 22.7 18.0 14.8 12.1 10.4 9.0 16.5 13.2 11.1 2.0% 2.4% 2.8% 23.1% 19.4% 20.6% 16.8% 3.8% Zayo Group ZAYO 6,010 18.5% 14.5% 31.4% n.a. n.m. 172.7 62.5 13.5 11.3 9.8 42.6 33.2 25.0 0.0% 0.0% 0.0% 9.8% 12.0% 12.3% 14.2% 34.8% TalkTalk Telecom TALK.L 3,101 1.9% 17.8% 30.8% 12.7% 23.2 14.7 12.8 10.5 8.0 7.3 17.9 12.1 10.7 6.6% 7.0% 7.3% 12.1% 16.2% 17.1% 12.7% 6.5% Tele Columbus TC1n.DE 1,135 27.4% 46.8% 70.8% n.a. 27.5 21.9 13.8 15.6 9.0 7.6 39.4 16.6 13.0 0.0% 0.0% 2.9% 8.4% 10.5% 11.0% 23.2% 32.9% Mean 11.5% 19.4% 30.0% 16.2% 24.0 46.4 24.9 11.8 9.3 8.2 25.7 17.8 14.5 2.3% 2.8% 4.0% 13.4% 14.1% 14.6% 17.1% 19.4% Median 8.0% 14.0% 23.9% 14.5% 23.2 23.3 18.3 11.4 9.1 7.8 18.8 15.9 13.2 2.0% 2.4% 2.9% 11.7% 13.4% 13.3% 17.1% 19.1%

Overall

Mean 11.1% 17.9% 25.0% 18.3% 21.0 32.1 19.7 10.5 8.6 7.7 20.4 15.1 12.9 3.4% 3.9% 4.8% 14.0% 13.9% 13.8% 19.3% 18.3% Median 6.5% 13.4% 17.0% 15.4% 20.3 18.0 14.8 10.5 8.0 7.3 17.9 13.8 12.6 3.3% 5.0% 6.0% 11.3% 12.0% 12.3% 17.5% 14.8%

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 28 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Key risks

Competition: VOC faces competition from larger operators TLS, Optus and TPM (and SPK, Vodafone in NZ) with stronger competitive positioning (e.g. greater ability to bundle, infrastructure ownership) and greater scale. Over time it will likely face increased competition in the Consumer segment from new entrants as the NBN rollout reaches greater scale. However we note that VOC: (1) has the lowest market share among its key competitors; and (2) is not facing a material increase in wholesale input costs (vs. competitors) with the migration to the NBN.

M&A integration/execution risk: While both have a strong track record of integrating acquisitions, combining VOC/MTU soon after VOC’s acquisition of AMM, will likely to be challenging. There is a risk that cost and revenue synergies from the merger could be lower/higher than our expectations.

Technology risk: We expect the NBN to accelerate the decline in legacy products such as PSTN. The key issue for MTU is that an average SMB customer (3 PSTN lines, 1 broadband line) spends 65%-75% of its monthly bill on PSTN products. One of the key challenges facing MTU will be growing other revenue streams to replace these legacy products.

Supplier risk: VOC’s two main suppliers of telecom services are TLS and Optus. As a reseller, MTU is exposed to risks such as: (1) price increases; (2) change in non-price terms and conditions; and (3) shut-off of supply of a certain product set. However, we believe these risks are mitigated given VOC’s stronger negotiating positioning following the merger: (1) VOC delivers significant wholesale revenues to TLS; (2) VOC can now leverage its own infrastructure as an alternative; and (3) TLS wholesale revenues are under significant pressure is the NBN rollout accelerates.

Accretive M&A: Both VOC and M2 have created significant shareholder value through accretive M&A. We expect this will continue as Vocus looks to increase its scale and capabilities.

Goldman Sachs Global Investment Research 29 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Board and Senior management

Exhibit 61: Board of Directors

Directors Title/Position Background Independence Current: PayPal Australia Pty (Chairman), Hills (Director), SAI Global (Director) David Spence Chairman Yes Prior: Unwired (CEO), OzEmail (CEO), Board of the Internet Industry Association (Chairman)

Current: Brentnalls SA (Chairman/Partner), Chartered Accountants, Governor’s Leadership Foundation (Fellow) Craig Farrow Deputy Chairman Prior: Brentnalls National Affiliation of Accounting Firms (Chairman), Yes Institute of Chartered Accountants in Australia (President), Institute of Chartered Accountant’s Public Practice Advisory Committee (Chairman)

Current: Vocus Communications (CEO) Geoff Horth Chief Executive Officer No Prior: M2 Group (CEO), Commander, Alcatel

Current: APNIC Executive Council, AusNOG (Co-founder), Wollongong Hawks (Director) James Spenceley Executive Director No Prior: Vocus Communications (Founder), AWA Limited (Non-exec director) Current: Aggregato (Non-exec director), Telco Together Foundation Vaughan Bowen Executive Director (Chairman) No Prior: M2 Group (CEO and Founder)

Non-Executive Deputy Prior: Amcom (Founder), iiNet (Board director), Albion Capital Partners Anthony Grist Yes Chairman (Founder)

Current: Vix Technology (Chairman), Snapper Services Ltd (Chairman) Prior: Optimisation New Zealand (CEO), Telecom/Gen-i's (now Spark Rhoda Phillippo Non-Executive Director Yes New Zealand) enterprise Trans-Tasman business (GM), Infratil Energy Australia (MD)

Current: PAS Group Limited (Non-exec director), Godfreys Group Limited (Non-exec director) Jon Brett Non-Executive Director Yes Prior: National Roads & Motoring Association, Investec Wentworth Private Equity (Director), Techway (CEO)

Michael Simmons Non-Executive Director Prior: SP Telemedia (now TPG) (CEO), NBN, TERRiA (MD) Yes

Source: Company data.

Exhibit 62: Senior Management

Senior Management Title/Position Background Joined Vocus

Geoff Horth CEO Prior: M2 Group (CEO), Commander, Alcatel 2016

Richard Correll Head of Finance (CFO) Prior: Ernst & Young, News Limited, Austar 2001

Prior: M2 Group (Commercial Director), Optus (Treasurer), Telstra John Allerton Head of Commercial 2016 Group, Ernst & Young, NAB

Head of Corporate & Matt Hollis Prior: PIPE (Manager), Demand Broadband, IntraPower 2010 Wholesale

Head of Consumer & Prior: M2 Group (Business Director), Clever Communications Australia Scott Carter 2016 Business Limited (MD), Hutchison, Request Broadband and PowerTel

Chris Deere Head of Technology (CIO) Prior: Ipera Communications (Founder) 2011

Current: Law Institute of Victoria (Member), Australian Corporate Lawyers Association (Member), Australian Institute of Company Directors Ashe-lee Jegathesan Legal & Secretarial 2016 (Member), STREAT (Secretary) Prior: M2 Group (General Counsel/Company Secretary)

Denise Hanlon Head of Human Resources Prior: Westpac, Lloyds Banking Group, ING Direct 2015

Prior: M2 Group (NZ CEO), CallPlus (CEO), Slingshot, Telecom New Mark Callander Head of New Zealand 2016 Zealand (now Spark)

Source: Company data.

Goldman Sachs Global Investment Research 30 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Appendix 1 – Economics of VOC/MTU migration to NBN

Economics of migration from TLS copper to NBN

Exhibit 63: We believe the migration of VOC consumer broadband customers from TLS Wholesale to entry level NBN services will largely with neutral for gross profit. If VOC can upsell to higher speed plans, this we estimate it could generate higher margins VOC – Transition from PSTN services to hosted voice services

ADSL2+ unlmited 12/1 Unlmiited 25/5 2TB (no 100/40 2TB (no (no voice calls) (no voice calls) voice calls) voice calls) ARPU Copper NBN NBN NBN Fixed voice A$ 10.0 Broadband A$ 49.9 59.9 69.9 89.9

Total customer ARPU A$ 60 60 70 90

ARPU ex GST 54.5 54.5 63.5 81.7

Costs Access costs Access costs A$ 24 27 38 Domestic backhaul A$ 2 2 2 International capacity A$ 2 2 2 TotalA$40283142

Usage costs CVCA$ 121212 Other (voice) A$ Total A$ 0 121212

Total costsA$40404354

Gross profit Gross profit A$ 14 14 21 28 Gross margin % 24% 24% 29% 31%

Source: Company data, Goldman Sachs Global Investment Research.

Economics of migration from PSTN services to hosted voice

Exhibit 64: We believe the migration to hosted voice services for SMB customers will be dilutive for revenues but likely to be neutral for gross dollar margin VOC – Transition from PSTN services to hosted voice services

Copper - Current Copper - hosted voice Copper - hosted voice ARPU 4 lines 4 lines 6 lines Fixed Voice - Line 1 A$ 72 40 40 Fixed Voice - Line 2 A$ 72 40 40 Fixed Voice - Line 3 A$ 72 40 40 Fixed Voice - Line 4 A$ 72 40 40 Fixed Voice - Line 5 40 Fixed Voice - Line 6 40 Fixed Voice - Line 7 Fixed Voice - Line 8

Broadband A$ 50 50 50

Total customer ARPU A$ 338 210 290

Costs Access costs + usage Fixed Voice - Line 1 A$ 37 8 8 Fixed Voice - Line 2 A$ 37 8 8 Fixed Voice - Line 3 A$ 37 8 8 Fixed Voice - Line 4 A$ 37 8 8 Fixed Voice - Line 5 A$ 8 Fixed Voice - Line 6 A$ 8 Fixed Voice - Line 7 A$ Fixed Voice - Line 8 A$ Broadband 40 40 40 Total A$ 188 72 88

Gross profit Gross profit A$ 150 138 202 Gross margin % 44% 66% 70%

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 31 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Appendix 2 – Consumer Broadband Plans

Exhibit 65: Comparison of consumer broadband plans

Copper/HFC Broadband Plans NBN Plans Plans Data Calls Other Plans Data Calls Speed ($) (GB) (unlimited) ($) (GB) (unlimited) (DL/UL in MB) Telstra (bonus 200/500/500 GB on $89/$119/$149 until 28/03) Telstra (bonus 200/500/500 GB on $89/$119/$149 until 28/03) $69 50 L $69 50 L $89 400 L, N $89 400 L Telstra Air included. $119 1000 L, N, M $119 1000 L, N, M Telstra TV on $119/$149 bundles $149 1500 L, N, M $149 1500 L, N, M 25/5, +$30 for 100/40 +$20 for base Foxtel; $75 100 - $75 100 - +$110 for Platinum $95 500 - $95 500 - $115 1000 - $115 1000 -

Optus (Stan until 30/04/16) Optus (Stan until 30/04/16) $70 200 L, N $70 200 L, N $90 Unlimited L, N Fetch connect & 3m Stan on all plans $90 Unlimited L, N $95 Unlimited L, N, M, 25 Int C $95 Unlimited L, N, M, 25 Int C 25/5; +$20 for 100/40 $115 Unlimited L, N, M, 25 Int CEntertainment included on $95/$115 $115 Unlimited L, N, M, 25 Int C $115 plan is 50/20 base, +$10 for 100/40 $80 200 - $80 200 - $100 Unlimited - $100 Unlimited -

Belong (TLS) Belong (TLS) $60 100 L $45 100 12/1, +$10 for 25/5, +$25 for 100/40 12m contract, $70 500 L $60 500 None 12m contract, $10/$5 a month more +$5 for no contract. $75 1000 L $70 1000 for no contract on $45, $60+

TPG TPG $40 20 PAYG $50 50 L, N $50 plan only on 12/1 $50 100 PAYG $60 Unlimited PAYG $60 250/250 (Unlimited on 12/1) PAYG 12/1 base, +$10/$30 for $70 Unlimited L, N, M or 100 Int min $70 Unlimited L, N, 100 Int min 25/5, 100/40 $80 Unlimited L, N, M, 15 Int C $80 Unlimited L, N, M, 10 Int C $88 Unlimited L, N, 80 Int C

iiNet (TPG) iiNet (TPG) $60 100 $60 100/100 VoIP L, N 12/1 PAYG $80 300 $80 1000 VoIP L , N 25/5, 100/40 for $30 +$20 for Netflix unmetered $100 600 $90 1000 VoIP L, N, M 25/5, 100/40 for $30 L, N, M $120 1000 $70 1000 VoIP PAYG $80 1000 VoIP L, N $90 1000 VoIP L, N, M

Dodo (VOC) Dodo (VOC) $50 10 PAYG $30 10 PAYG 12/1, $55 50 PAYG +$30 for Fetch TV inc E pack $40 50 PAYG +$10/$30 for 25/5, 100/40 $60 Unlimited PAYG $60 Unlimited PAYG but +$40 for 100/40 Unlimited

iPrimus (VOC) iPrimus (VOC) $60 40 PAYG $40 10 L, N 12/1, $70 100 PAYG $50 50 L, N +$10/$30 for 25/5, 100/40 $80 300 PAYG $70 Unlimited L, N but +$40 for 100/40 Unlimited $120 Unlimited PAYG

L - Local, N - National, M - Mobile

Source: Company data.

Appendix 3 – Telco Glossary

Exhibit 66: Telecommunications Acronyms Telecommunications: Acronyms ADSL Asymmetric digital subscriber line ARPU Average Revenue Per User BB Broadband HFC Hybrid Fibre-Coaxial IP Internet Protocol IRU Indefeasible Right of Use NAS Network Application Service NBN National Broadband Network OTT Over the top POI Point of Interconnect (for NBN) PSTN Public Switched Telephone Network SMB Small and Medium Business TIO Telecommunications Industry Ombudsman UBA Unbundled Bitstream Access UFB Ultra-Fast Broadband (NZ NBN)

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 32 March 10, 2016 Vocus Communications Ltd. (VOC.AX)

Disclosure Appendix Reg AC We, Raymond Tong, Kane Hannan and Anita Dinshaw, 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.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Raymond Tong: Australia/New Zealand-Telecom. Australia/New Zealand-Telecom: amaysim Australia Ltd., Chorus Ltd., Hutchison Telecommunications Australia, M2 Group Ltd., Spark New Zealand, Telstra Corp., TPG Telecom, Vocus Communications Ltd.. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for investment banking services in the past 12 months: Vocus Communications Ltd. (A$7.98) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Vocus Communications Ltd. (A$7.98) Goldman Sachs had an investment banking services client relationship during the past 12 months with: Vocus Communications Ltd. (A$7.98) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Vocus Communications Ltd. (A$7.98) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 53% 16% 63% 58% 52% As of January 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 3,254 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below. Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co- managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S.

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Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html. Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. 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United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/125/EC is available at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on

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macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. 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