Small Caps | Mar 02 2017
Growth in market share and industry consolidation opportunities underpin broker confidence in remote communications provider SpeedCast International.
-Organic growth in 2016 via taking market share
-Acquisitions being integrated successfully so far
-Harris CapRock merger creates largest player globally
By Eva Brocklehurst
Remote communications provider SpeedCast International ((SDA)) re-charged its batteries in 2016, making acquisitions and expanding its market share. Brokers believe underlying demand for remote communications will continue to grow strongly and this feature, plus industry consolidation opportunities, underpins confidence in the stock.
The company's 2016 results were messy, as expected, with a number of one-offs centring on acquisitions, integration and currencies. Most importantly, Morgans contends, operating cash flow was up 51% and free cash flow was up 33%. The company failed to hit its 10% organic growth target but still reported organic growth. The fact that growth was obtained by taking market share is a positive, in the broker's opinion, especially in the light of macro conditions.
At this point in time, Morgans believes organic growth will be limited. The main catalyst for a re-rating of the stock is the integration of current acquisitions and delivering a couple of clean results, free of one-offs. While not forecasting a recovery in the company's energy segment in 2017, Morgans believes investors are getting a free option on an eventual recovery.
The uncertainty for investors in SpeedCast, in the broker's view, centres on operating risks relating to the integration of acquisitions as well as the paying down of debt and creating surplus free cash flow. To date, a number of acquisitions have successfully been integrated and have delivered value for shareholders. Failure to successfully integrate new acquisitions, or to realise synergies and economies of scale, could result in disappointment, the broker suggests.
UBS believes the best way to estimate the 2017 earnings profile is from the bottom up, and using the second half of 2016 as a guide. The broker's calculations suggest an operational earnings (EBITDA) outcome of around $125m, even without organic growth or additional contributions from new contracts.
The enterprise and emerging markets division is expected to grow strongly in FY17, driven by cellular backhaul, new products and government contracts. Management noted the pipeline of contract opportunities has grown. Acquisitions made during 2016 contributed a combined $24.7m to revenue for that year.
Despite the stretched balance sheet and near-term headwinds in energy-related markets, Credit Suisse considers the stock inexpensive because of the longer-term growth potential and multiple drivers of incremental upside.
The growth outlook is expected to improve throughout 2017 because of a stabilising of the energy market and the company has noted sentiment has improved in recent months. The company should also benefit from greater exposure to the higher growth segment in the maritime sector, the broker suggests.
Harris CapRock
The company acquired Harris CapRock on January 1 and notes that $9m of the planned $50m in synergies has already been achieved. Harris CapRock revenue fell to US$315m in 2016 from US$420m in 2015 because of the downturn in the oil and gas industry and contract losses, including some to SpeedCast. Macquarie expects revenue to fall a further -5% on an underlying basis in 2017.
Nevertheless, this merger is expected to create the largest player globally in the maritime and energy sector and Harris CapRock remains key to the broker's forecasts in 2017.
The Harris CapRock transaction settled a few months earlier than Morgans expected and the acquisition is considered well placed to deliver pro forma EBITDA of US$76m in SpeedCast's hands, assuming no growth or decline in the core base.
Prior to selling Harris CapRock the vendors, Harris Corp, had returned the business to profitability after a number of tough years. Morgans believes SpeedCast acquired the assets at an attractive price at the bottom of the earnings cycle.
The assets were acquired for US$425m after earnings had declined substantially and Morgans believes there is significant medium-term cyclical upside, although this is not priced into forecasts. A material increase in earnings is not needed for the asset to create value for shareholders, although the broker suggests it would be nice.
There are four Buy ratings on FNArena's database. The consensus target is $4.36, suggesting 21.2% upside to the last share price. Targets range from $3.80 (UBS) to $4.83 (Macquarie).
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
