Speeding through Speedcast
Earlier this year we wrote about why we liked SpeedCast (ASX: SDA). Since May, we’ve seen another acquisition and the financial results – and a lot of volatility. Let’s look at these things one at a time.
UltiSat
In June, SDA purchased a satellite service provider for $US65 million, (with a further $US35 million consideration based on performance targets). UltiSat operates in the Government, military and Non-governmental organisation space focussed on the US Government.
Servicing this segment requires security clearance, relationships and expertise which would have taken SDA a long time to develop, so growing in this space by acquisition makes strategic sense. SDA highlighted the government as its 4th pillar of growth due to increasing demand for services, and this is not too surprising as it was emphasised as a growth area during their investor day earlier this year.
This is another strong growth segment, expected to grow at an 8 per cent compound annual growth rate through to 2025, within this segment UltiSat has been growing above market trend due to being positioned in faster growing segments within Government. This is just like being overweight Cruise ships has helped SDA grow its maritime business above industry rates.
This acquisition places SDA in a more diversified position with earnings coming from four key pillars: Energy, Maritime, Enterprise and Government. We see this as a positive.
Overall, we view the acquisition as a positive strategic move, and financially accretive.
Result
SpeedCast’s first half result came in line with expectations. What we particularly liked was the demonstrated strong cashflow which is being put to reducing debt, but also another expansion in earnings before interest, taxes, depreciation and amortization (EBITDA) margins to 21.4 per cent (from 10.9 per cent in FY2011 and 17.5 per cent in FY2015). With the benefits of economies of scale, we see further potential for this to grow. All eyes on the full year result now.
Volatility
We continue to see value in SpeedCast. The market remains cautious due to its elevated level of debt, and a slower recovery in energy. However, this is a highly cash generative business (96 per cent cashflow conversion), in a growing market with a scale advantage and expanding margins. Trading on less than 7x Bloomberg consensus FY2018 EV/ EBITDA – we continue to see value here and saw the recent share price volatility as an opportunity to gain exposure.
The Montgomery Funds own shares in SpeedCast International.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Shaun Ler
:
Hi Lisa,
I was just looking through the financial statements of Speedcast. If the rate of growth of the company’s free cash flow is declining, together with its recent large share issue (which I assume was used to pay down debt) + large borrowings – Could we still imply that Speedcast’s cash flow, intrinsically, is still “strong” as the bulk of the cash coming in is not internally generated from the business?
In line with the above, could this be destroying value for the shareholders as their capital is being put to repay debts, and that the business is growing via debt?
Then again, the time frame here might be relatively short (just 3 years of listed financial data) to make a conclusion…Happy to hear any thoughts.
Thanks Lisa.
Lisa Fedorenko
:
Hi Shaun,
You are correct – they did recently do a large share issue. However this was used to purchase Harris Caprock – a business around the same size that Speedcast was at the time. This was a transformational acquisition that significantly grew Speedcast’s economies of scale. Whilst in general it’s best to see a company purchase from it’s own cashflows (like it did more recently with Ulitsat), one of this scale generally requires some equity. Were the raisings used for debt rather than large growth opportunities, I would agree that it would be a concern, however this is not the case.
In terms of cash flows – you can get a clearer picture of the core business by looking at the conversion of EBITDA to operating cashflows, which came out a strong 96% at the last result.
Hope that helps answer your question.
Best,
Lisa