Satellite Can Make A Good Core
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After the NewSat debacle, Australian investors could be forgiven for being leery of the word “satellite.” But the stock market is a Darwinian environment, and the lurid collapse of NewSat Limited last year was a great opportunity for global satellite communications service provider SpeedCast International (SDA) to pick over the carcase of its fallen rival.
In July 2015, SpeedCast picked up NewSat’s teleport assets – a pair of satellite dishes in Western Australia and South Australia, that send and receive signals into space – for the fire-sale price of $12 million, not bad for assets that were turning over $22 million in revenue and generating operating earnings of $1.7 million. The NewSat sites were added to SpeedCast’s existing Australian network, which already included teleports in Sydney, Brisbane and Darwin. With them came most of the key operations and engineering staff, and most of the customer and supplier contracts.
In fact, SpeedCast was a much bigger operator than NewSat, and deserved to be looked at in a totally different light. Established in Hong Kong in 1999 by satellite owner, operator and service provider AsiaSat, SpeedCast initially offered internet access services to the SME (small-to-medium-sized businesses) market, but from 2003 started to upgrade its network, enabling it to offer more specialised services and target larger businesses that needed high reliability, significant support and customised solutions.
This approach morphed into a strategy of providing tailored, turnkey satellite communications solutions to specific high-growth industry segments, starting with shipping. In 2008 SpeedCast launched a global Ku-band VSAT (very small aperture terminal) maritime network, to provide connectivity for broadband internet, and related communications and media services to commercial shipping fleets. The VSAT devices are highly portable (they are suitcase-sized) and suit ships perfectly.
The maritime business was the template for SpeedCast’s increasing ability to develop satellite-based services to meet the specific needs of key industry segments. The company has built similar market capabilities to meet the needs of customers that include telecom carriers, Internet service providers, governments, NGOs (non-governmental organisations), militaries, enterprise (large multi-national companies) and resources companies. Many of these customers operate in remote locations, where wire-based communication is not possible or practical, but they need to be able to transmit large chunks of data, voice and video securely, and mobility is often essential.
To support this SpeedCast has 31 teleport operations around the world, and offers services in more than 90 countries. The company says it provides more than 5,000 links on land and at sea, supporting its customers’ mission-critical applications. SpeedCast has evolved into primarily a specialist VSAT service provider, with more than 20 VSAT hubs around the world. This is well-suited to the growth of the satellite industry, in which VSAT’s strengths – the ability to expand capacity, and lower average transmission cost – are highly relevant.
SpeedCast does not own or operate satellites, but leases transponder capacity from a range of satellite operators, on 41 different satellites, typically in either back-to-back contract arrangements or for periods of up to three years. It also leases capacity from teleport sites outside its own fleet. The company’s major telecommunications partners include OBS (Orange Business Services), NTT (Nippon Telephone & Telegraph) and KT (Korea Telecom).
Currently the business is focused on three customer segments: maritime (31 per cent of revenue), energy (18 per cent of revenue) and enterprise & emerging markets (51 per cent of revenue), which incorporates the mining, telecom, government and NGO and enterprise businesses. The portfolio of “solutions” comprises:
- OpenCast: a package for communications throughout the life cycle of a resources operation. It includes internet service for mission-critical operational communications, and residential staff applications such as pre-paid and post-paid phone cards.
- CelCast: outsourced transmission designed for cellular network operators to extend their coverage to remote areas that require satellite.
- FlyCast: designed for emergency response service providers, NGOs, peacekeeping forces and the military, FlyCast offers fast internet access, secure video or data transmission, high-quality VoIP (voice-over-Internet protocol) and advanced encryption.
- EduCast: used by schools, universities and distance education providers for secure, enhanced internet access. It includes filtering of adult content, compression to improve download performance, and concurrent broadcasting across the VSAT network of speeches and educational content in real time.
- UpCast: designed to aid with business continuity and disaster recovery for enterprise customers that depend critically on their information system infrastructure. Potential customers include stock exchanges, call centres, logistics operators, and banks.
Through almost a dozen major acquisitions over 2013 to 2015, SpeedCast has expanded and its geographic reach into Africa, Europe, Asia, and the Americas. The company has been determinedly technology-agnostic: it has its own Ku-band global VSAT network, and a global C-band maritime service, and also provides Inmarsat’s Global Xpress super-fast Ka-band broadband satellite network, but works on the philosophy of offering a large suite of services and a sales approach focused on figuring out the best solution for each customer. This expansion has delivered not only increased market reach, but has improved SpeedCast’s buying power with regard to satellite capacity. The company has reached the critical mass that allows it to achieve significant cost and revenue synergies, which flow through improved margins to the bottom line.
SpeedCast is also pushing into potential growth sectors, in particular, the energy sector, which is poised to become a new major growth engine in coming years. The maritime business has strong room to grow as it induces ship operators to migrate to VSAT broadband (currently the penetration of VSAT in the merchant shipping sector is less than 20 per cent), and expands into the yachting, cruise and fishing market segments. Media is another potential growth sector.
AsiaSat sold SpeedCast in 2012 to US-based private equity firm TA Associates, and SpeedCast’s management. In August 2014 TA Associates and the management floated 63 per cent of the company on the Australian Securities Exchange (ASX): TA Associates sold down its stake from 82 per cent to 25 per cent, while the management’s holding went from 18 per cent to 12 per cent.
The initial public offering (IPO) price was $1.96, giving the company a market capitalisation of $236 million and an enterprise value (total equity plus debt) of $279 million on listing. SDA chose to list on the ASX mainly because at the time, more than half of its revenue came from the Australia-Pacific region, and it felt that its market capitalisation would sit in a sweet spot to attract investor interest.
It has certainly done that, with the share price moving to $4.29, and the market capitalisation to $512 million.
For the full year 2015 (SpeedCast uses the calendar year as its financial year), revenue surged 42 per cent to $US167.6 million, net cash flow from operating activities increased by 28.8% to $17.9 million, and net profit came in at US$4.3 million, compared to a loss of US$6.9 million in 2014. A fully franked dividend of 3.65 Australian cents was paid.
According to Thomson Reuters, analysts’ consensus forecasts for 2016 see an earnings per share (EPS) boost of 35 per cent for SpeedCast, and a 37 per cent lift in the dividend. The growth platform looks very sound, and although the capital gain outlook from here looks more subdued than IPO subscribers have enjoyed, SpeedCast is worth following as a growth play. The analysts have a consensus price target on the stock of $4.71 (Baillieu Holst is the outlier at $5.11), which implies upside of 9.8 per cent from here.
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