Stock Picking - SpeedCast (SDA.AX)

At TAMIM we invest in stocks - not markets. The recent volatility in markets has highlighted to investors the need to own high quality growth stocks in their portfolios. Our partners at CBG utilise their growth focused investment style to highlight an interesting Australian investment, SpeedCast.

This week Michael Newbold from the manager of the TAMIM Australian Equity Growth IMA takes time out to discuss SpeedCast. While the Australian stock market seems to have taken a hiatus from its downward movements, it is extremely important to remember that this is not a set and forget market. You constantly need to be reviewing your portfolio and much like we do in our portfolio committee's, constantly re-evaluate your investment thesis for holding a particular position. It is also extremely important to review the various asset classes and investment styles of your investments. We know that your asset allocation decisions will be as important as your stock picking decisions. For a further discussion on asset allocation and stock picking please call us to arrange a time for one of our directors to meet with you. ​

SpeedCast is a high growth telecommunications business with leverage to increased satellite services demand and VSAT (two-way satellite ground station with a dish antenna that is smaller than 3 meters) penetration to deliver these services. Through organic growth and acquisitions, SpeedCast has strengthened its competitive position in high growth industry verticals & emerging geographies across APAC.

At the FY15 result in February, SpeedCast delivered 38% revenue and 42% EBITDA growth despite FX headwinds (20-25% of revenue is in AUS/EUR vs reporting currency being USD). Management is targeting double digit organic revenue and EBITDA growth pa over the medium term while progressing with its acquisition strategy in order to build out its verticals e.g. energy or martime. The industry is highly fragmented with the majority of competitors being localised with lower quality-of service, inferior expertise/technical capabilities, and diseconomies of scale. This provides synergy opportunities for SpeedCast.

SpeedCast is currently trading on 33x FY16F EPS with a modest 2.7% yield. It offers strong double digit organic revenue and EBITDA growth plus upside from acquisitions. Please note that EPS is impacted by amortisation of customer contracts. SpeedCast is trading at a more modest 19x adjusted for this impact.

Company background
​
​SpeedCast is a leading provider of satellite-based communication networks and services in the Asia Pacific region and to the global maritime industry. It designs, implements, integrates, operates and maintains communications networks combining satellite capacity and network infrastructure. SpeedCast also provides a range of value-added products and services, including user applications (voice, video conferencing and video surveillance), network optimisation (firewalls, filtering and data compression) and network monitoring and management (including reporting tools and remote access for IT technicians).
​
SpeedCast serves over 1,000 customers across over 3,000 terrestrial sites, predominantly in Asia Pacific (though its global presence was enhanced over CY15), and 1,700 offshore rigs and vessels with satellite services. SpeedCast is headquartered in Hong Kong but has a local (Australian) management presence. 

What do satellite service providers do?

​Satellite-based communications networks enable real-time broadband communications in areas where traditional terrestrial infrastructure is either unavailable or unreliable (eg due to war, natural disaster etc). It provides remote users with digital communication capabilities similar to those available at the corporate office. This includes making telephone calls, providing internet access and running applications to facilitate everyday operations. SpeedCast’s communications network has a global reach that uses 60+ different satellites, 15 different satellite operators and 30+ teleports. SpeedCast’s two largest customer groups are maritime and energy, which accounted for 31% and 18% of CY15 revenue respectively.

So how does SpeedCast make money?

​SpeedCast generates five main types of revenue that can be classified into three buckets: service revenue (fixed monthly fees), equipment revenue (sale of equipment on which they earn a margin) and wholesale VoIP revenue. Key industries for SpeedCast are set out below along with example customer industries.

How big is the addressable opportunity?

The global satellite services market is estimated by management to be worth US$5-6bn with SpeedCast’s biggest competitor having a c6% share (vs SpeedCast at c3%). The industry is therefore highly fragmented and a strong candidate for consolidation.

Key earnings drivers

• Growth in demand for satellite communication services by the maritime industry. Strong growth in this area is likely to be driven by acquisitions, the upgrading of older satellite systems to VSAT technologies, rising demand for bandwidth, improving crew welfare via entertainment and communications and tightening regulatory requirement involving safety systems.
• VSAT continuing to gain market share. Very Small Aperture Terminal (VSAT) technologies offer two-way communication via antennas and small satellite dishes and are SDA’s primary offering. VSAT is cost effective, provides ample bandwidth and is available for use in remote locations. Increasing MSS penetration is a risk. SDA increasing its market share of the VSAT providers. SDA is looking to win market share from both smaller players in the market and the two heavyweights, Harris CapRock and RigNet. Reflecting its recent investment in scale, SDA recently won a contract from Harris CapRock.
• Bolt on acquisitions. SDA acquired four businesses in the past year and is in the hunt for more. Acquisitions are targeted which operate in segments/geographies where SDA is underrepresented to add scale in an existing vertical. Targets have historically been immediately accretive on an earnings basis and we would expect this hurdle to be maintained.
• Expanding geographies. SDA recently entered the African market through its acquisition of Geolink. It is talking about opportunities in Latin America and the Middle East and may do this either organically or through acquisition.
• Expanding verticals. SDA recently entered the energy space through its acquisition of Hermes. Harris CapRock and RigNet (combined 60% market share) are the two major players in this space and SDA has won two tenders in the past week in this area, one from Harris CapRock. These two operators have been dealing with internal and external issues with reports of customer dissatisfaction providing an opportunity for SDA.
• Growth in value added services such as video conferencing, surveillance, VoIP, firewalls, L-band services and remote access management. Having already invested in the systems and hardware, these services can further integrate the client with SDA and encourage a longer-term relationship and contract. 

Catalysts for share price movement

• We believe there are 2 likely cause of a positive share price re-rating. This would be either an accretive bolt-on acquisition or an announcement of large contract wins in the energy sector. 
• Keep your eyes peeled for any corporate announcements and we wish you enjoyable and successful investing.

​Happy investing,

​The team at TAMIM.