Lonely - But Lucrative - Up In Space For NewSat
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NewSat should be seen as a speculative pure-play on the satellite industry – but a play that is based on a track record that has earned it a roll-call of blue-chip clients and a very high global reputation in its field.
One of the genuinely unique stocks on the Australian Securities Exchange (ASX) is NewSat Limited (NWT), Australia’s largest – and only listed – satellite communications company.
The $224 million market-capitalisation NewSat delivers Internet, voice, data and video communications via satellite to a range of corporate and government customers worldwide, including the US Department of Defense, through leased satellite capacity. To provide these services NewSat buys high-bandwidth capacity from seven vendors over ten different satellites, but the company has ambitious plans to build its own fleet of five satellites.
The first of these, Jabiru-1, is scheduled to be launched in the second half of 2015.
Just how ambitious are NewSat’s plans can be judged from the fact that when the company set out to fund Jabiru-1, the $600 million funding task was ten times the company’s then market capitalisation. But NewSat has raised $500 million in debt (mainly from US and European export credit agencies) and vendor finance, and $105 million in equity, to mount the project, which involved commissioning a $268 million satellite from Lockheed Martin and a $116 million rocket to get it into space, from Arianespace in France.
However, NewSat has already secured US$644 million worth of binding pre-launch bandwidth contracts for Jabiru-1, equivalent to about one-fifth of capacity. The company expects that proportion of pre-sold capacity to be about 60% at launch date, which it says would generate revenue of up to $3 billion over 15 years, or $200 million a year, and earnings before interest, tax, depreciation and amortisation (EBITDA) of about $150 million a year.
To put that in context, NewSat’s revenue in FY13 was $39.3 million, and EBITDA was $12.1 million.
If Jabiru-1 were to reach capacity of 90% – which NewSat says is common in similar satellites – that would be $4 billion of revenue, or close to $220 million of EBITDA every year for 15 years.
NewSat listed in 1999, at the height of the dot.com fever, as Multiemedia Limited, an internet technology developer. But in the early 2000s the company moved into satellite communications, offering satellite broadband services in Australia, Asia and the Middle East, under the name NewSat, which became the company name in 2006.
The service used Dutch fixed satellite company NewSkies’ fleet of six geostationary satellites. In 2005 the company bought NewSkies’ two modern teleport facilities in Adelaide and Perth. At a stroke, this made NewSat one of the largest teleport operators and satellite service operators in the southern hemisphere.
Buying the teleports enabled NewSat to move up the food chain and pick up government and enterprise customers. In particular, NewSat built up a solid base of customers in the mining, oil and gas and pipeline industries – all of which needed the ability to transmit large chunks of data, voice and video to and from remote locations, securely. Media and telecommunications companies are also big customers.
The high security and reliability of the NewSat link also caught the attention of the Pentagon, plus the fact that the NewSat satellite network has some of the best ‘look’ angles into the Middle East. Since 2008, NewSat has provided mission-critical communications for the US military in Afghanistan. For example, NewSat carries all of the “welfare” communications – personnel talking to family and friends online or by video-link – to and from Afghanistan.
Later this month the first satellite to bear NewSat’s fleet name of Jabiru – Jabiru-2 – will be launched in French Guiana, but the launch represents opportunistic naming rights: the satellite is owned by Malaysian operator MEASAT.
Jabiru-2, which provides 216 MHz of capacity on the Ku-band, covers high-demand regions including Australia’s Pilbara, Kimberley and North-West Shelf regions, and Indonesia, Timor Gap, Timor-Leste and Papua New Guinea. Jabiru-2 will provide an earnings boost in FY15 – NewSat owns six transponders on the satellite, which should generate $9 million–$10 million a year in revenue.
But Jabiru-1 – Australia’s first commercial satellite on the more advanced Ka-band, with more than 7.6 GHz of capacity – is the main game. There will be 226 transponders to sell on Jabiru-1, and NewSat owns them all.
The “big bird” will extend NewSat’s coverage to 75% of the globe; from Australia, Asia, the Middle East, Africa, across the Indian Ocean, extending into Europe and across the Pacific Ocean, reaching into the West Coast of the USA. The satellite will cover areas of high need – the Middle East, Africa, Russia and the Central Asia ‘stans.’
Given this range, the US government is likely to be a major customer: surveillance – particularly of the new 3-D capability – requires a lot of capacity. Commercially, there has been an explosion in the need for space by telcos from areas in Africa and the Middle East and Asia where cable and fibre are not real options – mobile telephony requires cellular ‘backhaul’ through satellite. NewSat sells the fast capacity to enable that.
Around the equator, at every two degrees, there is a ‘slot’ for satellites: in February 2011, NewSat bought seven of these slots, to serve as a platform for the Jabiru program. An eighth slot was added in March 2012: NewSat owns this “space real estate” in perpetuity. Into those eight orbital slots, it can place between eight and 20 satellites, covering high-demand regions of the world. The company has the capacity, and now it is building the capability to grow into that capacity. From here, NewSat’s job is to populate its real estate and sign up more customers.
The first half of FY14 was tough, with revenue down 19% to $16.6 million, partly because of US withdrawal from Afghanistan and ongoing budgetary constraints, and the difficult market conditions in the oil and gas and mining industries, which, combined, resulted in lower-than-expected contract renewals and new business.
NewSat has not been a stellar investment to date. It is not a dividend payer, and it lost investors 5% over the last 12 months. Over the last three years, it has lost 2% a year, but is in the black over five years, gaining 13.4% a year. At the December 2013 interim result, both return on assets (ROA) and return on equity (ROE) were negative.
But in the context of the NewSat story, that is neither here nor there. As the planned five-satellite Jabiru fleet is rolled out, the company’s financial performance can be expected to improve – very significantly. NewSat should be seen as a speculative pure-play on the satellite industry – but a play that is based on a track record that has earned it a roll-call of blue-chip clients and a very high global reputation in its field.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au