Carnival contract signed but coupled with another downgrade
SpeedCast International (SDA) has announced the finalisation of the Carnival renewal contract and downgraded FY18 guidance again. SDA now expects underlying EBITDA for full year 2018 of approximately US$130-135 million. At the mid-point, this is a 5% downgrade to EBITDA guidance set in August 2018, and this is the second downgrade from SDA in six months.
In August 2018 we highlighted our concerns over the quality of the SpeedCast business and noted that we will be looking closely at free cash flow and SDA's debt position at the next result. The recent update reinforces our quality concerns.
SDA recently refinanced their debt facility and their banking covenant requires Net Debt to Last Twelve Months Pro-Forma EBITDA of <4.0x (if they draw >35% of their revolving credit facility). This is the key debt metric investors need to be conscious of. Our focus remains on operating cashflow, free cash flow and SDA's net debt position. We will not see any of this until their result is released on 26th February 2019.
Key risk/rewards relate to SDA's ability to successfully integrate the acquisition and deliver free cash flow to de-gear the balance sheet. Their capacity to deliver organic growth remains unclear. There should be upside risk from a prolonged oil and gas recovery, but we are yet to see this eventuate.
We have reduced our Earnings Per Share forecasts by approximately 15% for FY18 and beyond. Our valuation and share price target (Morgans clients can login to view) have been reduced by 28%. We retain our Hold recommendation.
Morgans clients can login to view our detailed report and revised share price target for SpeedCast International (SDA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.