Shares in satellite operator SpeedCast plunged yesterday, losing more than 30% of their value after directors revealed it would spend $US135 million buying Globecomm and provided weaker than guidance for the 2018 financial year ending December 31.
The shares ended down 37% at $4.20 after touching a low of $4.06. That fall wiped more than half a billion off the value of SpeedCast making the release yesterday a very expensive lesson for all involved.
SpeedCast management had told the market in May it was comfortable with market consensus estimates of 2018 earnings before interest, tax, depreciation and amortisation (EBITDA) of about $US155 million.
But yesterday it lowered guidance by 10% for full-year EBITDA to between $US135 million and $US145 million, sending the shares off a cliff.
The surprise in the first-half earnings report was a 17% drop in earnings from energy customers due to fewer off-shore oil rigs and delays in oil projects.
Seeing SpeedCast provides satellite communications, it can’t make money if the oil rigs (and potential clients) are not being deployed.
The company said yesterday the rebound in the oil rig business would be delayed, until 2019.
“Full year 2018 Energy revenue expected to be down 10% compared to full year 2017, with 2H 2018 revenue recovery based on the existing backlog and pipeline.
"While delayed, the recovery in the offshore energy market is now expected to be stronger than previously forecasted. Speedcast’s market share, and strong customer base, position it well to participate in the market recovery. This is expected to drive growth in 2019 and beyond,” directors said yesterday.
CEO Pierre-Jean Beylier was confident this business would improve.
“Disappointingly, the Energy sector suffered from delays in the market recovery, but we remain bullish about our ability to significantly benefit from the Energy sector’s recovery, which we believe will be stronger than previously forecasted.
"We have a diversified business and will continue to invest in market segments where we are confident we can deliver strong organic growth,” he said in yesterday’s statement.
The company said revenues were up 24% in the first half to US$304.9 million; underlying EBITDA grew 14% to $US60.4 million from $US53.2 million and underlying net profit after tax rose 37% to $US21.1 million from $US15.4 million.
The Board declared an unchanged fully franked interim dividend of 2.40 A cents a share for the six-month period to June 30 (an unchanged dividend on a higher sales and profit report is always a sign of a board pulling its horns in and trying to conserve cash, especially in this case with the big acquisition of Globecomm).
SpeedCast said it would pay around $US135 million on a cash and debt free basis for Globecomm and expects to settle the deal in the December quarter of this year.
SpeedCast said the buy "strengthens Speedcast’s global position in Government, Maritime and Enterprise and it strongly complements last year’s acquisition of UltiSat. This will double Speedcast’s revenue in Government, and add more scale, visibility and capabilities in this strategic growth market
Speedcast reckons it will generate over $US15 million in annual cost synergies within 18 months after the acquisition (by mid 2020).
The purchase “will be funded by a fully underwritten $US175 million add-on to Speedcast’s existing 7‐year senior secured credit facility (due 2025) from the US institutional term loan market,” directors said yesterday.
“This will also be used to repay a portion of Speedcast’s Revolving Credit Facility and enhance Speedcast’s liquidity and cash reserves
CEO Pierre-Jean Beylier was suitably upbeat about the deal “The acquisition of Globecomm is fully in line with our strategy to consolidate our market and thus build competitive advantages based on scale and capabilities. Globecomm is particularly complementary to UltiSat as it strengthens Speedcast’s position serving Government customers at a time when government spending globally is expected to rise. I am excited to have the Globecomm team joining Speedcast.
“They will strengthen our innovation capabilities with new solutions and strong engineering experience, as well as enhancing our system integration propositions,” he added.
ASX investors took a completely different view of the deal and the downgraded guidance for the year to December and downgraded the share price by a considerable margin.
