Small Caps | Jul 25 2017
Satellite service provider SpeedCast International continues on the acquisition trail, with its latest considered a strong strategic move into the international government sector.
-UltiSat provides direct access to US government opportunities
-Adds another integration task after the recent Harris CapRock acquisition
-Demand for remote communications and strong market share underpin confidence in the stock
By Eva Brocklehurst
Satellite service provider SpeedCast International ((SDA)) continues on the acquisition trail, acquiring UltiSat for a maximum consideration of US$100m. This is a satellite service provider to the military, US government, international government agencies and non-government organisations, with coverage in 130 countries.
Macquarie suggests the government vertical market will become the fourth pillar of growth for the company and combined revenues from government for both SpeedCast and UltiSat should be in excess of US$100m. Moreover, the acquisition provides direct access to US government opportunities.
The acquisition is around 10% accretive to FY18 forecasts for earnings per share, based on Macquarie's estimates. Synergies are expected from the rationalisation of corporate support functions, satellite capacity procurement and teleport consideration.
The broker observes the underlying demand for remote communications and bandwidth will continue to grow strongly. Along with market share growth and further industry consolidation this underpins Macquarie's confidence in the stock and an Outperform rating is maintained.
Canaccord Genuity considers this a logical transaction as the company continues to strengthen its growth profile, and a step in solidifying SpeedCast's position as the dominant service provider across multiple sectors. The government vertical estimated to be worth US$4.8bn per annum and growing to US$9bn in 2025.
The broker, not one of the eight monitored daily on the FNArena database, maintains a Buy rating and raises the target to $5.02 from $4.92.
Morgans downgrades to Hold from Add following the announcement as, while financially the acquisition makes sense, a discount is applied to valuation to reflect the view that management needs to deliver on prior acquisitions in order to de-gear and prove these have created equity value. The broker expects this will take longer than the next 12 months, hence the downgrade.
Acquisition Details
The acquisition is for initial consideration of US$65m, involving US$60m in cash and US$5m in scrip. The earn-out consideration is up to US$35m and will be paid over two years, pending UltiSat meeting requirements. Macquarie estimates the acquisition represents around seven times FY17 operating earnings (EBITDA), reducing to around 5.5 times post synergies and anticipated tax benefits.
UltiSat is based in Gaithersburg, Maryland, and has its headquarters in Washington DC. The business was established in 2003 and has 150 employees. The company has a teleport in Denmark which can access more than 100 satellites in the geosynchronous arc from 55 degrees west to 70 degrees east. The company has also integrated and delivered a wide range of solutions in manned and unmanned airborne intelligence, surveillance and reconnaissance.
Positives for UBS include the attractive acquisition multiple and strong earnings accretion. Yet, this broker also points out the acquisition represents the eighth since 2015 and heralds a new integration task for SpeedCast as well as a lift in debt.
UBS calculates around 10% pro forma accretion to earnings in FY18 excluding synergies, and around 11-12% assuming $1.5m of initial synergies and agrees a re-rating of the stock would hinge on a return to organic growth and evidence of execution on the integration of the acquisitions.
Harris CapRock
Meanwhile, the Harris CapRock integration is ahead of schedule, with around 75% of key milestones achieved by the end of June. Management expects the integration to be 98% complete by the end of October and Macquarie believes this should then allow maximum focus on the UltiSat acquisition.
Canaccord Genuity flags the cost synergies, guided at $15m in 2017 and a further $9m in 2018, which are likely to be exceeded. The broker believes the successful and smooth integration of Harris CapRock has made this next transaction possible.
With respect to the integration of Harris CapRock, Morgans would like to see this successfully completed and the all-important free cash flow being generated, as monetising the acquisition is a key financial risk. This would mean the balance sheet de-gears and provides a catalyst to return to a positive view on the stock.
There are three Buy ratings and one Hold (Morgans) on FNArena's database. The consensus target is $4.38, suggesting 27.2% upside to the last share price. Targets range from $3.87 (Morgans) to $4.83 (Macquarie).
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