Is Speedcast International Ltd a buy at this share price?

Credit: Pixabay

Speedcast International Ltd (ASX: SDA) is currently trading near 52-week lows of $3.03 – currently $3.31 – and that may be an attractive price.

Go back to the start of November and the satellite broadband and communications provider’s share price was nearer $4.00. But there’s one major reason why the share price is much lower now – and it’s not bad news as you might expect.

You see, Speedcast has acquired Harris CapRock for an upfront cost of US$425 million (~A$560 million) – virtually doubling its size.

Harris CapRock is a provider of communications networks for remote and harsh environments, primarily maritime and energy markets. In the 12 months to end of June 2016, the company saw revenue of US$363 million and pro-forma earnings before interest, tax, depreciation and amortisation (EBITDA) of US$60 million.

The acquisition means Speedcast’s global footprint increases with more global customers and the ability to service multinational companies operating in several regions of the world. Harris CapRock is also a leading supplier to the cruise industry – a rapidly growing tourism sector.

Speedcast Harris Caprock

Source: Company presentation


To fund the acquisition, Speedcast needed to raise capital – around A$295 million from a 2-for-3 accelerated renounceable rights issue at an offer price of $3.10. That was a 21% discount to the company’s closing price of $3.93 on November 1.

That will result in around 95 million new shares being issued – hence the lower share price.

The good news is that the Harris CapRock acquisition is expected to be double-digit earnings per share accretive (despite the dilution).

Speedcast is forecasting 2016 financial year (FY16) EBITDA of US$40 million, with US$23 million coming in the second half. However, the company does say that organic revenue growth has slowed this financial year, compared with double-digit growth in FY15.

Foolish takeaway

It’s difficult to assess the value of the company’s shares following the dilution and acquisition.

Growth via acquisition has bitten many companies and it’s disappointing to see organic growth slowing.

On an optimistic note, demand for data and telecommunications is unlikely to slow down anytime soon, producing strong tailwinds for Speedcast.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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