Shares in satellite operator Newsat Limited (ASX: NWT) extended a relief bounce for a third day but efforts to resolve its financial troubles could get a lot more complicated with a major client refusing to say if it will honor its $100 million plus binding contract with the company.
NewSat gained another 5%, or half a cent, to hit a one-week high of 11 cents in early trade and has bounced by 32.5% since Thursday.
However, the stock is still down by 21% since management told the market last week that it was trying to resolve a dispute with financiers of its satellite, Jabiru-1, and that satellite builder Lockheed Martin has issued a default notice against NewSat for a missed $21 million payment.
One of NewSat's largest clients, TrustComm, told the Herald Sun last week that it had "serious concerns" about the launch of Jabiru-1, which has been delayed till early 2016.
TrustComm is one of the key customers that's underpinning the financial viability of Jabiru-1 as its contract is worth between $US105 million ($135 million) and $US114 millon ($146.5 million).
When I contacted TrustComm's US-based chief operating officer Ian Canning, he complained that Jabiru-1 is already three years behind schedule and the default notice issued by satellite builder Lockheed Martin against NewSat is only exacerbating his frustration.
"All these elements in combination make it difficult for TrustComm to credibly position Jabiru-1 space segment as a solution for our customers at this time," he said.
What's also alarming is that TrustComm has been trying to renegotiate the original agreement with NewSat for the last 12 months and was looking to reduce the value of the contract "materially".
NewSat is considering a $60 million equity raising in the wake of the Jabiru-1 financing problems but it is uncertain how a disagreement with TrustComm will impact on this.
NewSat has been rocked by governance issues and a profit downgrade in the past and its announcement to the stock exchange in December continues to tout Jabiru-1's $US636 million worth of pre-launch contracts. This includes the contract with TrustComm.
The original three-year deal signed in 2011 meant that NewSat would have received $US28 million in the first year of launch with the balance of $US77 million to $US86 million over the following two years.
Financing for the satellite is tied to NewSat achieving a certain level of pre-launch contracts, although the level is not disclosed.
Given the uncertainty over Jabiru-1, management's poor track record on disclosure and broader governance issues, shareholders might be better off selling the stock into any rally.
