Small Caps | Jun 16 2015
-Upside from maritime, energy sectors
-Costs of delivery declining
-Market share growth achievable
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By Eva Brocklehurst
SpeedCast International ((SDA)) is a satellite communications company which has experienced growing demand for its services, gaining market share as it expands into new geographies and industries. Canaccord Genuity expects strong revenue growth to continue in the long term, as more operating systems require the connectivity and enlarged bandwidth satellite services can provide. SpeedCast does not own satellites but purchases capacity to service over 2,000 clients, which are spread over 4,000 land and sea-based sites such as vessels and offshore oil rigs.
The broker expects a reasonably high trading multiple over the next few years and considers the 2016 price/earnings ratio of 14.7 attractive, especially when viewed against the median of global satellite industry peers at around 15.4, initiating coverage with a Buy rating and $3.60 target. Catalysts include contracts to be won in the energy space, where the broker expects plenty of action over the next 12-18 months. Compound annual growth of 10% in revenue within the maritime segment is expected, which the broker expects to account for around 33% of 2015 revenue.
The positive outlook is being driven by improvements in operational efficiency and a growing reliance on modern communications systems among vessels. Another aspect is the desire to improve crew morale via entertainment and communications as well as tighter regulatory requirements involving safety. Satellite communications costs are estimated to be less than 0.5% of a vessel’s operating cost but can improve operations substantially, so the benefit appears straightforward.
Canaccord Genuity expects maritime, and expansion into the energy market, to represent the two largest growth segments. The addressable portion of these markets is worth around US$2.3bn a year, by the broker’s calculation. Liquidity is expected to increase over the coming year as escrowed stock becomes available, which could support a positive re-rating. The company reports in US dollars and generates 78% of earnings in US dollars. With the euro and Australian dollar declining there is some pressure on revenue from these regions, with 15.0% coming from Australia and 8.0% from Europe.
The cost of delivering bandwidth is declining and, therefore, the broker believes there is an opportunity to grow margins. Moreover, there is some evidence of a supply/demand imbalance developing in regards to satellite capacity coming on the market from new installations. This, potentially, means SpeedCast could purchase bandwidth at lower rates. Meanwhile, additional support for margins comes from growing scale which has increased the company’s buying power.
The company designs, implements, operates and maintains satellite networks for clients that are unable to connect to land-based networks and have mission-critical assets, or an unreliable connection. SpeedCast is increasing its market share in VSAT – very small aperture terminal – technologies, which offer two-way communications via antennas and small satellite dishes. VSAT is a preferred product as it maintains advantages over other offerings. It is cost effective and available for remote locations.
Canaccord Genuity observes the two dominant providers, Harris CapRock and RigNet, have lost some appeal recently. Why? The broker has feedback which suggests clients want high quality connections, highly qualified support in appropriate locations and an extensive network. SpeedCast offers all these features. Were it to increase market share of maritime units to 5.0% from the current 3.9% it would add US$9.5m in revenue above the organic growth rate of 10%. The broker considers a greater market share is readily achievable.
SpeedCast has made seven acquisitions in less than three years with five while it was a private company. Canaccord Genuity expects acquisition multiples to be 6-10 times earnings but does not have additional targets factored into in its forecasts. The company listed on ASX in August 2014. UBS noted back in March the acquisition of Hermes Datacomms was a catalyst which would accelerate growth in the global energy market. UBS has a Buy rating and $3.45 target. Morgans is also positive on the stock, with an Add rating and $3.05 target.
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