Speeding Through Speedcast
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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.
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.
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.
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.
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