Small cap Newsat Limited plunges 22%: Here’s what you need to know

Small cap Newsat Limited plunges 22%: Here's what you need to know

Do you want to gamble on Newsat Limited (ASX:NWT) in 2015?

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published January 28, 2015 9:52 am AEDT

What? Shares in small-cap satellite company Newsat Limited (ASX: NWT) fell 22% in early trade on Tuesday after the company provided the second company update in as many days. The previous update, released on Friday last week, casually mentioned that discussions were ongoing between Newsat, key construction contractor Lockheed Martin and Newsat's financiers about the funding required for the construction of Newsat's Jabiru-1 satellite. The company said that it would update the market on developments with the lenders as appropriate.

As it turned out, developments over the weekend (presumably) forced Newsat to update the market on Tuesday.

So what? Newsat has advised shareholders that progress payments to Lockheed Martin for Jabiru-1 have become overdue as a result of the ongoing discussions with financiers to recommence funding. The company now expects that up to $60 million in additional equity will need to be raised, which would significantly dilute existing shareholders in the $90 million company.

Newsat understands that Lockheed Martin is continuing with construction of the satellite, however doubts have now emerged about what impact a late delivery will have on financing. In a somewhat farcical chicken and egg scenario, the financiers are holding back on finance because they are concerned about a potential extended delay to the project if the satellite is delivered late from Lockheed Martin, who won't deliver until they are paid.

Jabiru-1 is currently scheduled for completion in Q1 2016, which will allow it to be launched in the proposed March to May 2016 launch window. Missing this window would presumably be disastrous for the company and less-than-ideal for long-term shareholders.

Now what?

It would take a brave investor to buy Newsat shares at the moment. Newsat has the potential to be a great long-term income generating stock when Jabiru-1 is launched and this period was always going to be the riskiest time to own the stock. When funding is reinstated and any equity raising is complete may be the ideal time to buy.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.