peedcast (SDA) – wasn’t always a small cap but it has been...

peedcast (SDA) – wasn’t always a small cap but it has been shrinking for the last few months. Now capped at around $700m.

What does SDA do?

The company is a world leader in providing mobile access to data and phone services for the Cruise Industry, oil platforms, and other remote access locations

The company has recently acquired Globecomm for $134m with the transition completed in December. The company priced a US$175m term loan adding to its existing US$425m facility at LIBOR plus 2.75%p.a. This increase in debt is one reason the market feels uncomfortable with the outlook.

The question is about the rate of growth and whether it is organic or just part of a roll-up strategy.

Some recent announcements.

• SDA announced it has won a new contract with a subsidiary of one of the largest mobile operators in the Americas to increase mobile coverage in Central America.
• International guides 2018 underlying EBITDA $130m-135m vs prior $135-145m.
• The renewal of the Carnival was a significant positive but the delay has led to a profit downgrade and the company share price has not recovered since.
• Macquarie has just lodged a substantial shareholder notice with a 5% holding.
• One negative for the company is the low oil price. There has been significant churn in its offshore oil platform business and this division has performed below market expectation.

What the Brokers Say

• UBS is NEUTRAL with a PT of 320.
• Macquarie is similarly unimpressed with a NEUTRAL and a PT of 300c.
• Morgans has a HOLD and a PT of 293c.
• Credit Suisse has an OUTPERFORM and a PT of 550c but the analyst appears to gone on a cruise and not updated forecasts since the end of August. Long and wrong it seems.

Debt does seem to be an issue with gearing at 142%. It seems to prefer debt to equity for a string of acquisitions and any rise in the LIBOR rate will have a  negative impact on the company profitability.

Lumpy contracts with the likes of Carnival can be problematic and large organisations are slow to move which is both good and bad for business. Sticky once they are won but suspect they also drive a hard bargain.

Shorters are active in the stock too and seem to be in the box seat at the moment. 9.4% of the stock is currently short. Big jump after the profit downgrade in August.

Hard to get excited about the company I must say.

The only positive is that it could not get much worse. We own it for clients and will hold but acknowledge the risks. One we will have to keep a careful eye on. With such a large short position any good news can set the bears scampering for cover. That could be an opportunity to trim our position into strength.