NBN Contract Adds Major Scale To SpeedCast
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SpeedCast International ((SDA)) has finally revealed the large customer deal that had tantalised brokers over recent months, albeit with a minor delay to the start date for the contract.
The company has a 10-year agreement with NBN Co to build and manage network services for the satellite component of the National Broadband Network.
The later start date may have a minor adverse fact on 2017 earnings, as the company had indicated in prior guidance that some revenue and earnings from equipment sales relating to the contract could be included, but Credit Suisse expects it to be offset by an earlier closing of the Ultisat acquisition.
One of the main reasons UBS maintained a Buy rating in November was the potential for this substantial contract to materialise. The broker agrees that while it is unclear what offsets there are to the proportion of revenue lost to 2017, unchanged guidance suggests a miss is unlikely.
In mid-January the company signed a large deal with Noble Drilling, one of the largest offshore drilling contractors and the only one of the major operators with which the company was yet to do business. Credit Suisse calculates this deal will add US$20-30m of direct and indirect revenue by FY19. In addition to the direct earnings this deal is evidence of increasing market power.
Noble Drilling was a long-standing customer of competitor Rignet and Credit Suisse also understands Rignet does not have an exclusive global contract with its largest remaining customer, Ensco, and may therefore provide scope for further contract gains among the major drillers.
The company is now better positioned to take advantage of what appears to be the early stages of a global offshore up cycle, the broker asserts.
In order to service the contract with NBN, which represents an increase in scale for the Australian business, the company will open a new office in Melbourne. This is an endorsement of the company's expansion strategy which Canaccord Genuity suggests has placed SpeedCast in a competitively advantageous position for this type of contract globally.
The company is larger and more diverse than other service providers and has extensive support staff and infrastructure. The company will work with the Sky Muster geostationary satellites.
The contract is split into two components. The first is a design and build component with the majority of revenue will be recognised upfront in 2018. The NBN release states that enterprise-level satellite services should be available by early 2019.
The second is a managed service component with revenue spread out over the life of the contract. The base value is $107m but there is upside to $184m depending on the uptake of demand-driven services.
Canaccord Genuity expects the company is now well-positioned for an extended period of strong growth and de-risking. Energy indicators suggest rig numbers are improving while the shipping industry is experiencing stronger pricing and governments are increasing military expenditure.
The broker, not one of the eight monitored daily on the FNArena database, expects 2017 results to be solid and growth to accelerate through 2018. Canaccord Genuity has a Buy rating and $6.15 target and believes market expectations for 2018 are conservative.
Assuming a large proportion of the upfront revenues are recognised in 2018 – although margins are likely to be less than 20% – UBS suggests there is potential for high single-digit contributions from this deal. Yet the broker awaits the results on February 27 before updating its forecasts.
Credit Suisse upgrades FY18 and FY19 estimates for earnings per share by 11% and 14%, respectively, because of higher operating earnings as well as a lower US tax rate. The strong increase in tendering activity in recent months is envisaged providing material scope for further upside from FY19.
The broker retains an Outperform rating and increases its target to $7.50 from $6.00 with the stock remaining a high conviction call because of an undemanding valuation and multiple areas of incremental earnings upside.
FNArena's database shows two Buy ratings and one Hold (Morgans) for SpeedCast. The consensus target is $6.11, signalling 11.4% upside to the last share price. Targets range from $5.62 (Morgans, yet to update post the announcement) to $7.50 (Credit Suisse).
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