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Should you buy Superloop shares after today’s half year results release?

The Superloop Ltd (ASX: SLC) share price won’t be going anywhere today after the provider of connectivity services throughout the Asia Pacific region placed its shares in a trading halt following the release of its half year results.

Management requested the trading halt whilst it conducts a fully underwritten institutional placement and 1 for 18 accelerated non-renounceable entitlement offer to raise approximately $31 million.

The company’s founder and largest shareholder, Bevan Slattery, has committed to take up all his rights. Net proceeds will be used to strengthen the company’s balance sheet by reducing net debt and providing additional funding capacity to take advantage of near term infrastructure opportunities.

The funds will be raised at an issue price of $1.25 per new share, which represents a sizeable 19.6% discount to the last close price.

What about its results?

In the first half of FY 2019 Superloop posted an 18% increase in revenue on the prior corresponding period to $60.3 million.

This was driven by a 10.4% increase in revenue from Superloop’s Connectivity segment to $22.2 million. The Connectivity segment is focused on connecting offices, campuses, data centres, and homes via owned fibre, owned fixed wireless, and NBN.

The company’s Broadband segment more than doubled its revenue to $20.3 million during the half. This segment offers Superloop WiFi which provides Guest WiFi in hotels, student accommodations, and campuses.

Its strong growth offset a soft performance from Superloop’s Services segment which offers cybersecurity, cloud and managed services, and IT equipment reselling. Segment revenue fell almost 22% to $14.1 million due partly to the discontinuation of low margin equipment and software reselling.

While Superloop’s revenue grew during the half, the same cannot be said for its earnings.

Earnings before interest, tax, depreciation and amortisation (EBITDA) fell 40% on the prior corresponding period to $4.5 million. This reflected the change in focus from managed services to connectivity and broadband and the short term duplication of costs during transition period.

Looking ahead, management appears optimistic that the second half will be stronger. It expects its strong connectivity sales momentum in the first half to translate into second half revenues. In addition to this, cost savings initiated in January 2019 are expected to flow through into the half and beyond.

Another potential growth catalyst is the INDIGO submarine cable and NBN backhaul network, with customer billing commencing during the second half.

Looking further afield, management believes Superloop is positioned to capture bandwidth growth throughout Australia, Singapore, and Hong Kong, and has a strategic goal of being Asia Pacific’s leading fibre network operator, leveraging wholly owned infrastructure.

Should you invest?

While I wouldn’t necessarily rush in to buy Superloop shares when they return to trade, once the dust settles on the capital raising I think it could be a good long term option for investors alongside fellow Bevan Slattery founded companies Megaport Ltd (ASX: MP1) and NEXTDC Ltd (ASX: NXT).

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Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. 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 Scott Phillips.

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