Satellite internet provider Speedcast International Ltd (ASX: SDA) has had an explosive year, with its shares rising 96.5%, to hit their highest point all year just yesterday.
While the catalyst for the price rise appears to be mostly the promise of rapid growth in the future – as a result of several recent announcements – Speedcast also turned in a respectable set of results this week.
Here are some of the highlights from its half-year report:
- Statutory revenues grew 32% to US$71.7m
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) grew 32% to US$12.7m, with margins improving from 16.4% to 17.7%
- Statutory profit of US$2.2m, compared with loss of US$5.5m in first half 2014
- Underlying* profit of US$6.8m, up 42% from US$4.8m in first half 2014
- Earnings per share of US2.19 cents per share
- Dividend of US3 cents per share, equivalent to 40% of underlying profit
- Several new contract wins in Marine and Energy sectors, with significant results to flow through in the second half of 2015
- Synergies and earnings accretion from several acquisitions expected to flow in second half of 2015 and in 2016
- Cash at bank of US$22.7m and debt of US$83.6m
*excluding transaction and non-recurring costs
So What?
Speedcast remains a fairly high risk, high-reward way to play growing demand for internet services in remote areas. With gearing (debt divided by debt + equity) of 49% and a soaring share price, investors are betting heavily that future success will materialise.
Fortunately, Speedcast can cover its interest expense many times over with its cash-flow from operations, reducing the risk of financial stress if future growth doesn't materialise. Additionally, since the company is now profitable the risks have also reduced measurably.
On the downside, since management is still planning to invest heavily to grow the business I found it a strange decision to pay a dividend, especially since the dividend is larger than earnings per share for the year.
Now What?
Management indicated they expect to make additional acquisitions over time where they find opportunities that mesh well with Speedcast's existing business. These will likely be funded through a combination of cash and debt, which is why I would have preferred to see the company hold back on dividends for the time being.
Speedcast looks to be trading on a Price to Earnings (P/E) ratio of somewhere between 30 and 75, if you double half-year underlying and statutory profit to the full year. However, with second half earnings expected to accelerate as a result of acquisitions and organic growth, the actual ratio could be somewhat lower.
With decent, growing foreign earnings exposure, its recent success and the potential for a rapid ramp-up of profits in the future, Speedcast makes for a compelling investment case but investors will want to look further into whether future growth can justify today's high price.
