Small Caps | Jul 02 2019
After downgrading FY19 guidance substantially, Superloop has assured the market that the errant contract at the heart of the downgrade is still on track.
-Contract expected to materialise in FY20 earnings
-Significant long-term upside potential
-Connectivity segment growing amid underperformance in services
By Eva Brocklehurst
The end of the financial year has not favoured Superloop ((SLC)), as a significant contract failed to be finalised. The company has assured the market that negotiations are continuing.
If successful, brokers assume this will be reflected in future earnings, including FY20. The company made no comment about prior operating earnings (EBITDA) guidance for FY20 of $26-30m and, while not entirely clear, Morgans now expects this may require around $10m in transactional operating earnings in order to be achieved.
The quantum of the particular commercial agreement was not disclosed but Morgans calculates a value of $5-10m in terms of operating earnings. Further deals are also possible, providing upside risk, but Morgans stresses this is far from guaranteed.
Deutsche Bank believes the company's new strategy will take time to demonstrate traction after a period of restructuring. The ownership of unique fibre assets across Asia-Pacific provides a strong level of valuation support, although momentum remains a concern for the broker.
Morgan Stanley retains a positive view on the stock, based on the opportunity in the Asia-Pacific telco enterprise market. However, the broker agrees with Deutsche Bank that sales momentum and execution are below expectations and, hence, remain of concern.
Canaccord Genuity still finds the growth profile intact and believes the benefits of new contracts should be realised in FY20, forecasting underlying operating earnings of $9.0m. The investor community is expected to mark down FY20 operating earnings below prior guidance and the broker considers this reflected in the share price.
Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Buy rating, lowering the price target to $1.60 from $2.00. Morgans continues to envisage significant long-term upside upon successful cost reductions and sales execution, assessing that, after spending four years building its unique assets, the pressure is now on management to deliver on the strategy.
Superloop has lowered its FY19 earnings guidance range (EBITDA) to $8-9m from $13-18m. Prior forecasts were based on certain transactions being recognised in FY19, while the recent takeover bid has occupied substantial time and targeted cost savings have been delayed. Morgans suspects the distraction from QIC's conditional, and now defunct, bid could have delayed other small deals in addition to the cost reductions.
The connectivity segment continues to show growth but this is being offset, Canaccord Genuity notes, by the underperformance in services and, to a lesser extent, broadband. Superloop has engaged with its lenders and believes its revised guidance is within the terms of its debt agreements.
The company has also indicated a reduction in holdings of a non-core investment and stated it is not in breach of banking covenants. Canaccord Genuity expects some of the company's intangibles will be reviewed, pointing out the underperforming BigAir services business carries an estimated $40-45m in goodwill.
Morgans, too, finds it plausible that the BigAir services business could put around $53m in intangibles at risk and highlights that forecasts assume upfront cash payments are realised, which would help lower debt levels.
FNArena's database has two Buy ratings and one Hold (Deutsche Bank). The consensus target is $1.73, suggesting 27.5% upside to the last share price.
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