Will satellite stock SpeedCast bounce back from its share price crashes?
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For several years SpeedCast (ASX:SDA) was a large cap and hence too big for Stockhead.
But multiple price crashes have shrunk the company to a market cap of $456m. On July 5 last year it traded at $6 but at 3pm Thursday sat at $1.83.
On August 28 last year it fell 38 per cent. While its results were positive, the earnings outlook was cut to $135-$145m having previously been $155m.
Then on Tuesday morning it cut the outlook again and the stock fell once more — 38 per cent at market open. The second was, “a very disappointing downgrade”, according to stock broker Baillieu.
Substantial holder Indus Capital Partners sold around half of its 6 per cent stake in the company – nearly $17m.
The day before, two other tech companies fell after similarly downgrading its profit forecasts by the millions — Adacel (ASX:ADA) and Superloop (ASX:SDL).
Speedcast blamed several factors on its most recent downgrade including NBN delays. SpeedCast has a 10-year contract to build the NBN’s satellite services, which the company won in early 2018.
But it blamed the downgrade on “delays to some expected revenue” and “lower profitability through additional resources being added during Q2 2019 to ensure the successful delivery of the project”.
Last year Speedcast forked out $US135m ($192.1m) to buy fellow satellite play Globecomm. But Globecomm’s expected contribution to earnings, previously forecast at $US10m, are lower due to higher churn and delayed business wins.
The company also suffered from stagnation in the satellite market and civil unrest in Mozambique causing a delay in its service delivery to a worker camp in the African nation.
Analysts believe the share price won’t fall further. However, according to a Baillieu report released on Wednesday, it will take some months to recover.
“We believe it will take 6-12 months of delivery on guidance for management to rebuild its credibility with the market,” it said.
“We believe the stock is probably oversold but sentiment is firmly against it and earnings visibility is limited.”
But Baillieu still predicted earnings growth, to $156m in FY20 and $178m in FY21.
Credit Suisse and Macquarie also wrote reports telling their clients to “hold” the stock, forecasting little fluctuation in the forseeable future.
But even if the company’s share price recovers, it will still have debt to pay. According to Bloomberg, $635m of it — including the $135m it borrowed to snap up Globecomm.
Tuesday’s earnings downgrade caused ratings agency S&P Global Ratings to cut Speedcast’s credit rating from B+ to BB-. The recovery rating on its debt did not change — although current levels indicates “average recovery prospects”.
“It is not immediately clear the extent to which management would protect its balance sheet from further deterioration in its financial performance,” S&P said.
“The negative outlook reflects the risk that broad-based operational challenges will further weaken Speedcast’s credit metrics and tighten covenant headroom.
“The negative outlook also reflects doubts over the company’s organizational effectiveness and its ability to realize the expected returns from its inorganic growth strategy. Moreover, the company will likely struggle to quickly repair its credit metrics within ratings tolerances.”