Speedcast International Limited is a global leader in providing telecommunication networks and service-based satellite communications.
About Speedcast Shares (ASX: SDA)
Speedcast offers managed network services, value-added services, equipment sales, wholesale voice, professional services and system integration to around 140 countries globally. After a bunch of acquisitions during the last six years, the company has extended its network services to more industries such as maritime, energy, enterprise, telecommunications, mining, government, private enterprise and media.
Speedcast has around 1.28 billion market capitalisation, which is third largest after Chorus Limited and Vocus Group Limited within the telecommunication service industries Australian exchange market.
Speedcast Dominates Due to Its Unique Technology
Speedcast has a unique strategy, which provides tailored telecommunication solutions to satisfy different customers’ needs. By the acquisition of UltiSat, the company now engages with customers from North America, Europe, Brazil and Indonesia, and the acquisition of Harris CapRock escalates the company to become a market leader in maritime and energy.
Speedcast TV On Demand which lets users get access to information anywhere, SIGMA Gateway Xtreme which can control both VSAT network and 4G services and GO4SPEED may strengthen potential opportunities to increase its revenue.
Speedcast has also just appointed a new CFO who has extensive experience as a financial leader and is experienced in M&A, integration and change management, which may keep the company in a positive financial position throughout organic growth and subsequent takeovers.
The main weakness of Speedcast is finance as it expands its current debt for the acquisition of Ultisat and raised $295m from existing shareholders through an entitlement rights offer for Harris CapRock. Consequently, it has a 141% D/E ratio in 2017 and Interest payments on debt are not covered by earnings (EBIT is 2.2 times of annual interest expense).
The Speedcast current goodwill has increased 3.6 times to $623 million since the acquisition of Harris Caprock and Ultisat, which may be overestimated as the goodwill could not be appropriately measured.
Growing Demand For Telecommunication Benefits Speedcast
Due to its unique technology and growing demand of customers’ requirement, Speedcast may have more opportunities to expand the business to other regions. Renewal agreements with AsiaSat to upgrade the AsiaSat 9 satellite in East Asia, Indonesia and Myanmar could work to provide better quality in network services.
Due to the acquisition of Harris Caprock in 2017, Speedcast has become a market leader in telecommunication related to the maritime and energy industry, which means it could take more active strategies to get more market share.
So far there is limited environmental regulation to the company’s operation in many countries, and if governments are concerned about environmental issues caused by telecommunication industry, Speedcast may be limited in development.
ROE Ratio of Speedcast International Limited Is Less Than 2%
Compared with the industry benchmark of ROE ratio 28.65%, Speedcast shares didn’t sufficiently use shareholders’ equity and produced a weak return on equity last year (1.86%). Its revenue increased to 235.9% compared with 2016, due to incremental costs, net income declined by 6%.
The D/E ratio is 141%, which means Speedcast shares raises funds mainly through debt, which brings the pressure of interest payment and a high level of risk. The market holds high expectations for the company with the P/E ratio of 187.14, compared with the benchmark of 19.6.
The basic earnings per share were decreased by nearly 35% from 2015 to 2017. Since Speedcast shares are in the growth stage and still exploring new sectors such as energy and maritime, EPS is expected to rise in the future.
Net profit margin and P/B ratio performed well last year. ASX SDA shares was sufficient in using resources to generate profit and had a positive profit margin (1.08%), even though this is a bit thin. In addition, Speedcast may be undervalued because of the lower P/B ratio (3.25) comparing with a benchmark of 4.86 in the industry.
ASX SDA Shares Looks Strong in The Future Despite Its Low ROE
Even though Speedcast might have environmental regulations, it should not limit its development because of high technology within the business and broadened markets as well as additional sectors for expansion.
The company is still in the growth stage, and even though it has high P/E ratio and low EPS, it is expected to have growth opportunities after more mergers and acquisitions.
This article on Speedcast is written by Henry Fung, Managing Director at MF & Co. Asset Management, a boutique investment firm based in Sydney, Australia. For MF & Co.’s full website and further articles follow the link: MF & Co.