Recent Share Price Movement, page-16

In the chart below, I’ve plotted down the following:
• Full-Year and Half-Year Reports
• Acquisitions (Green)
• Revision of Full-Year EBITDA Guidance (Red)

As mentioned earlier, when Speedcasthad released their first Financial Report (2014) on 25/01/15, it had beenwonderfully received, paving the way for a 126% increase in the share price to$4.751 over the following 8 months (26/10/2015). Speedcast’s meteoric rise sincebeing listed on the ASX saw its inclusion to the S&P/ASX 200 mid-2016.

Throughout 2016 and 2017, investorswhere looking closely to see whether Speedcast could realise synergies of itsmultiple acquisitions; Hermes Datacommunications, Geolink Satellite Services, NewSatTeleport & Satellite Services, SAIT Communications, ST Teleport, and NewComInternational. This kept SDA at a fairly constant share price between $3-4.

On 29/08/17, Speedcast released their2017 Half Year Report and their positive performance reassured investors thatthe company was progressing in the right direction. With renewed confidence,the share price of Speedcast jumped 68% ($3.34→$5.62) from releasing their 2017Half Year Report to 27/02/18 when they released their 2017 Full Year FinancialReport.

With its promising performance andprospects, as well announcing a 10-year deal with NBN Co to deliver enterprise-gradesatellite services, analysts at Credit Suisse had retained their “outperform” rating,and set a price target of $7.50 in early February 2018. Later in the same month,a broker note had been released from UBS stating that it’s retaining its “buy”rating and lifted its price target to be $5.80.

At this point, there was widespreadenthusiasm for what Speedcast had been able to achieve in such a short periodof time, and after climbing to be the largest provider of remote communicationsand IT services provider in the world, investors saw huge potential for futuregrowth. However, the enthusiasm came as a double-edged sword. Around the timeof releasing their 2018 Half Year Report, the company’s PE Ratio was in excessof 200, and its Market Capitalisation saw heights of approximately AU$1.64b.

Upon release of their 2018 Half Year Report,Speedcast had downgraded its guidance for underlying FY 2018 EBITDA toUS$135-145m. Down from its previous guidance of US$155m. This hit the market hard,as a downgrade was the opposite of what they needed, which was justificationfor such a high valuation of the company. What ensued was a drop of 32% in asingle day, and the beginning of Speedcast’s bearish sentiment.

This is also the period when shortsellers entered the story, with 6.4% of the shares shorted by 26/09/18. It didn’thelp either that on 24/12/18 Speedcast again downgraded its guidance forunderlying EBITDA to be US$130-135m. Down from US$135-145m, which was already adowngrade from US$155m. Though, keeping in mind that this would still be anincrease from the previous year (2017) at US$122.6m EBITDA.

When the 2018 Full Year Financial Report was released on 26/02/19, Speedcast stated that it expects to deliver moderate organic revenue growth and underlying EBITDA in the range of US$160-171m. In a climate when investors were still hurting from falling from previous heights, and short sellers were circling, panic was a natural response when Speedcast announced on 02/07/19 another downgrade in guidance for their FY 2019 underlying EBITDA to be between US$140-150m. Down from US$160-171m. Once again, this would be an increase from the previous year (2018) which reported US$132.03m, however this obviously wasn’t the focus, but rather Speedcast announcing for the third time in the past 12 months a downgrade in underlying EBITDA guidance.

Then came the last dramatic fall ofSDA’s share price, this came at the release of their 2019 Half Year Report. Thereport included an increased revenue and underlying EBITDA compared to itsprevious corresponding period, however on the flip side, Speedcast experienceda negative impact from a non-recurring impairment of goodwill of US$154.8m, andNet Debt increased to US$625m. In addition, no dividend was declared in thefirst half, nor will there be for the second half. In this report, Speedcastreaffirmed their guidance for FY 2019 of EBITDA in the range of US$150-160m(including $10m of leasing reclassification benefit).

And this is where we find ourselves now.After an 86.1% drop from $6.83, Speedcast’s share price is currently $0.955with a Market Capitalisation of AU$229m and PE Ratio of 4.08 (a far cry fromAU$1.64b and PE Ratio in excess of 200). And this would also be a good time toplace the situation into perspective.

As previously mentioned in my earlier poston 09/01/20, the company is still profitable and growing. For 8 years straight,Speedcast had achieved record revenue and EBITDA each year, with expectations foranother record year upon the release of their 2019 Full Year Report on 25/02/20(approx. AU$1,042m Revenue & AU$218.5m EBITDA). It’s clear that past downgrades devastated SDA’s share price and investor sentiment, however in the words of previous US President Barack Obama “better is good”, meaning that although he couldn’t meet the expectations of an entire nation, improvements were made and still have value. Who knows where SDA would be now if their guidance had shown more conservative improvements, allowing them to avoid ever announcing a downgrade.

Currently there are 23 companieslisted in the ASX as belonging to the “Telecommunication Services” industry.Below is their current PE Ratios:

Company ASX Code & PE Ratio
5GN: n/a	AYS: 13.1	CNU: 63.29	FSG: n/a	FRX: n/a
HTA: 433.33	MAQ: 33.44	MNF: 32.8	OPC: n/a	REF: n/a
SAS: n/a	SPK: 20.2	SDA: 4.08	ST1: n/a	SLC: n/a
TLS: 12.02	TOM: n/a	TPM: 17.88	UNL: n/a	UWL: n/a
VOC: 28.58	VN8: n/a	ZIP: n/a

*Companies that have no earnings or that arelosing money don’t have a PE Ratio.

If we put SDA aside for now and focuson its peers that have a PE Ratio (9 companies), the average PE Ratio is 72.74.Even when taking out HTA as an outlier, the average would be 27.66. Even when comparingSDA with the second lowest PE Ratio in its industry, that’s still 4.08 againstTelstra’s 12.02. Yes, 200+ back in 2018 was excessive, but 4.08 is a hugedisparity from its industry average.

In regards to its net debt of $625m, aspreviously mentioned in my 07/01/20 post, SDA’s Leverage Ratio covenant is 4.5x.The company last reported it being 3.6x, and in their 1H 2019 Results Presentation,they made a “Leverage Ratio target below 4x at the end of 2019”. Since therehas not been any announcements that this had to be revised, or wasunsuccessful, this may suggest that this target had been achieved

With such massive fall in share price,the goal posts have shifted, likely without anyone noticing. But the significanceof the change cannot be understated. When the share price was $6.83, the taskfor SDA was to prove that it’s worth the high valuation. Whereas now, SDA has anentirely different task, and that’s to prove that it doesn’t deserve such a lowvaluation.

Istill hold, that at $0.955 SDA is greatly undervalued, and there are twoupcoming opportunities for Speedcast to demonstrate this. First is in a littleover 5 weeks time on 25/02/20 they will release their 2019 Full Year Report.This will allow the company to show their current performance, and on 25/08/20they will release their 1H 2020 Report, which will show where they are heading.My prediction is that between February and August of this year, there is anoutstanding opportunity for the share price to rise. These two dates will serveas a double-barrel shotgun to take down the bear that’s been terrorising thiscompany.