Speedcast International (SDA.AX / SDA AU)

Transcription

1 Asia Pacific/Australia Equity Research Wireless Telecommunication Services Rating (from NOT RATED) OUTPERFORM Price (23-Jan,A$) 3.65 Target Price (A$) 4.10 Target price ESG risk (%) NA Market cap (A$mn) Yr avg. mthly trading (A$mn) 21.5 Projected return: Capital gain (%) 12.3 Dividend yield (net %) 3.0 Total return (%) 15.3 Target price is for 12 months. Research Analysts Lucas Goode lucas.goode@credit-suisse.com Total return forecast in perspective 110% 60% 10% - 40% 12mth Volatility 52 Week Hi- Lo *Target return Share Price CS Target Rtn Mean Source: Company data, Thomson Reuters, IBES, Credit Suisse estimates Performance 1M 3M 12M Absolute (%) Relative (%) Speedcast International (SDA.AX / SDA AU) ASSUMING COVERAGE CapRock adds more Energy to the story Lucas Goode is assuming coverage of SDA following the departure of the previous analyst. CapRock deal transformative for SDA at an attractive price: SDA recently closed the US$425 million acquisition of CapRock, more than doubling the company's size and materially increasing its oil & gas exposure (45% pro forma revenue vs 14% pre-deal). Whilst the acquired business faces earnings headwinds, we view the transaction as an opportunistic upweighting in energy at the bottom of the cycle and at an attractive multiple (5x LTM EBITDA post-synergies vs previous transactions on 9-12x). Multiple growth drivers; 19% EPS CAGR FY17-20F: We increase FY17F and FY18F EPS by 1% and 16%, respectively, with accretion from the CapRock acquisition offsetting organic downgrades due primarily to softness in energy. We forecast FY17-20 EPS CAGR of 19% driven by: (i) modest recovery in the energy cycle; (ii) continued strong demand growth in maritime, particularly cruise; and (iii) synergies from the CapRock acquisition. We view an earlier/stronger energy sector recovery, incremental revenue and cost synergies, bandwidth savings through increased buying power and deleveraging of the balance sheet as potential sources of further upside. Not without risks: While we see substantial upside if SDA is able to successfully integrate CapRock and execute on its strategy, we are cognisant that the stock faces several potential risks, including: (i) ongoing energy sector weakness; (ii) integration challenges; (iii) a stretched balance sheet; and (iv) potential price erosion in end user markets. Assume coverage with Outperform, $4.10 target price: We set our target price in line with base case valuation of $4.10. Our blue sky valuation (incorporating a stronger recovery in energy and incremental economies of scale on bandwidth) is A$6.00. Despite the stretched balance sheet and near-term headwinds in energy, we view SDA as inexpensive on a 2018F P/E of 10x given the company's longer term growth potential. Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E Revenue (US$ mn) EBITDA (US$ mn) EBIT (US$ mn) Net Income (Adj.) (US$ mn) EPS (Adj.) (USc) Change from previous EPS (%) n.a. (11.5) EPS growth (%) Consensus EPS (USc) P/E (x) Dividends (Ac) Dividend yield (%) Price/Book (x) Net debt/ebitda (x) 2.9 (2.1) Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Speedcast International (SDA.AX / SDA AU) Price (23 Jan 2017): A$3.65; Rating: OUTPERFORM; Target Price: A$4.10 ; Analyst: Lucas Goode Income Statement 12/15A 12/16E 12/17E 12/18E Revenue EBITDA Depr. & Amort. (7) (10) (46) (43) EBIT Associates Net interest exp. (3) (5) (16) (15) Other Profit before tax Income tax (4) (6) (16) (22) Profit after tax Minorities Preferred dividends Associates & Other Normalised NPAT Unusal item after tax (11) (10) (37) (34) Net profit (Reported) Balance Sheet 12/15A 12/16E 12/17E 12/18E Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net Debt 84 (86) Cash Flow 12/15A 12/16E 12/17E 12/18E EBIT Net Interest (3) (5) (16) (15) Depr & Amort Tax Paid (3) (3) (4) (10) Change in Working capital (6) (4) 2 0 Other cash and non-cash items (0) 0 0 (0) Operating cashflow Capex (7) (10) (34) (36) Capex - expansionary Capex - Maintenance Acquistions & Invest (62) (98) (454) 0 Asset sale proceeds Other Investing cashflow (69) (108) (488) (36) Dividends paid (6) (6) (16) (22) Equity raised Net borrowings (1) (59) Other financing cash in/(outflows) Financing cashflow (16) (81) Total cashflow (397) 2 Adjustments Movement in cash/equivalents (397) 2 Earnings 12/15A 12/16E 12/17E 12/18E Equiv. FPO (period avg) EPS (CS adj.) (c) EPS growth (%) DPS (c) Dividend Payout (%) Free CFPS (c) Valuation 12/15A 12/16E 12/17E 12/18E P/E (CS) (x) PEG (x) EV/EBIT (x) EV/EBITDA (x) Dividend Yield (%) FCF Yield (%) Price to book (x) Returns 12/15A 12/16E 12/17E 12/18E Return on Equity (%) Profit Margin (%) Asset Turnover (x) Equity Multiplier (x) Return on Assets (%) Return on Invested Cap Gearing 12/15A 12/16E 12/17E 12/18E ND/ND+E (%) 75.6 Net Net Debt to EBITDA (x) 2.9 Net Int Cover (EBITDA) (x) Int Cover (EBIT) (x) Capex to Sales (%) Capex to Depr (%) G L C G L C Environment Social Governance Global Local Country MSCI IVA Rating L G C TP ESG Risk (%): 0.00 TP Risk Comment: We have not included any valuation impact for ESG in our DCF driven price target, given no specific issues. MSCI IVA Risk: NR Share price performance May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 SDA.AX S&P ASX 200 Index On 23-Jan-2017 the S&P ASX 200 Index closed at On 23-Jan-2017 the spot exchange rate was A$1.32/US$1 Speedcast International (SDA.AX / SDA AU) 2

3 Key investment highlights Transformational deal at an attractive price SDA is acquiring CapRock for US$425mn, or less than half of what Harris paid for the two component parts of the business in The transaction multiple of 7x LTM EBITDA presynergies or just 5x pro forma LTM EBITDA post synergies compares to historical transaction multiples of 9-12x EBITDA. While CapRock has been under pressure, we view this as an opportunistic move that enables SDA to acquire a major industry player and materially increase scale while paying a trough multiple on trough earnings. Upweighting in energy a risk worth taking The depressed oil price over the last two years has led to a material drop in exploration activity, with the US rig count down two thirds from peak and most deep water capacity still idled. This has resulted in steep revenue declines for energy-exposed services business, including CapRock (2016F revenue down 25% YoY). However, there have been green shoots over the past six months with both the oil price and onshore activity in particular up substantially from mid-2016 lows. Given the low purchase price and material synergies ($24mn p.a. by end of year 2), the potential upside from a recovery in the oil & gas sector more than offsets the near-term earnings headwinds. SDA now global leader in maritime CapRock also more than doubles the size of SDA's existing Maritime business, with the combined company now the global leader in maritime broadband services. CapRock is primarily exposed to the high-growth cruise segment, which Northern Sky Research projects to witness revenue at a 17.5% CAGR through 2019 due to the rapidly increasing bandwidth demands and expectations of end users. Increased scale provides upside on bandwidth, contract wins SDA is now the world's largest commercial buyer of satellite capacity, achieving that status during a period of oversupply in the global satellite capacity market according to our analysis. In conjunction with greater geographic coverage, SDA's increased buying power provides scope for incremental reduction in capacity costs and thus higher gross margins. Additionally, SDA's increased scale and geographic coverage both increases SDA's ability to tender for and win global contracts and enables it to credibly offer expanded services to existing customers, creating incremental revenue opportunities. Strong long-term growth outlook: 19% EPS CAGR FY17-20F Whilst we expect a soft energy segment to continue to weigh on top line growth in FY17, we forecast mid-single digit revenue growth from FY18F driven by a partial recovery in the energy cycle and continued strong demand growth in maritime. We note that SDA has historically been able to generate top-line organic growth of >10%. With margins expanding due to operating leverage, economies of scale in bandwidth purchases and synergies from the CapRock acquisition, we forecast FY17-20 EPS CAGR of 19%. Outperform, A$4.10 target price Our target price for SDA is set in line with our base case valuation of $4.10. This results in an Outperform rating. We note that our Blue Sky valuation which incorporates a stronger recovery in the energy sector and realisation of incremental economies of scale on bandwidth purchases for SDA is $6.00. There is uncertainty around the timing of an energy sector recovery, integration risks and the difficulty in accurately forecasting earnings at a business with so many moving parts. However, at just 10x FY18F P/E we feel that these risks are more than priced in and the current share price does not adequately reflect the company's long-term earnings power. Speedcast International (SDA.AX / SDA AU) 3

4 CapRock deal transformative for SDA Transaction more than doubles SDA in size, increases energy exposure In November 2016 SDA announced that it had agreed to acquire Harris CapRock ("CapRock") from government contractor Harris Corporation for US$425mn, or c7x LTM EBITDA pre-synergies. CapRock, which was formed in late 2010 when Harris bought CapRock Communications and merged it with Schlumberger Global Connectivity Solutions ("GCS"), is a global leader in the provision of communications services to the energy and maritime industries. CapRock generated US$60mn of EBITDA on US$363mn of revenue in the 12 months ended June The transaction more than doubles SDA in size in terms of both revenue and EBITDA (including a full year's impact from previous acquisitions). SDA generated pro forma revenue and EBITDA of US$244mn and US$43mn respectively in the 12 months to June. Figure 1: Pro forma LTM revenue (12m to Jun-16) 363 Figure 2: Pro forma LTM EBITDA (pre-synergies) SDA reported M&A ex- CapRock CapRock Pro forma SDA reported M&A ex- CapRock CapRock Pro forma Source: Company data. Source: Company data The CapRock acquisition materially increases SDA's exposure to the oil & gas industry given that Energy comprised 66% of CapRock's LTM revenue despite the pressure on that business during the current downturn. SDA said at the time of acquisition that CapRock's revenue is expected to decline 25% YoY in 2016, largely due to weakness in Energy. Energy comprised just 14% of SDA's pro forma revenue base immediately pre-deal. It is now the company's largest segment, responsible for just under half of revenue. The transaction also more than doubles the size of SDA's Maritime business, creating the number one global provider of maritime broadband services. CapRock's Maritime business is heavily exposed to the attractive (and fast growing) cruise segment of the market. Figure 3: SDA revenue split by industry pre-deal Maritime 36% Figure 4: SDA revenue split by industry post-deal E&EM 20% Maritime 35% E&EM 50% Source: Company data. Note: 12m to Jun-16 pro forma. Energy 14% Energy 45% Source: Company data. Note: 12m to Jun-16 pro forma. Speedcast International (SDA.AX / SDA AU) 4

5 Whilst increased exposure to the currently depressed Energy sector at an attractive multiple is a key aspect in understanding the deal's rationale, the transaction also enables SDA to fill in gaps in its geographic coverage to create a truly global player. More than half of CapRock's revenue is generated in the Americas, by far SDA's weakest region pre-deal (only 6% of revenue). The company now has a relatively even split across APAC, EMEA and the Americas, giving it a global reach and opening up opportunities in both bidding for worldwide contracts and rationalising satellite capacity costs. Figure 5: SDA revenue split by geography pre-deal Figure 6: SDA revenue split by geography post-deal EMEA 40% EMEA 37% APAC 29% APAC 54% Americas 6% Source: Company data. Note: 12m to Jun-16 pro forma. Source: Company data. Note: 12m to Jun-16 pro forma. Americas 34% SDA now global leader in both Energy and Maritime Despite being a major driver of industry consolidation in recent years, SDA was still some way behind the leading industry players in both Energy and Maritime. This is no longer the case following the acquisition of CapRock, with SDA now the largest player in both segments. In addition to the near-term synergies laid out by the company at the time of acquisition ($15mn and $9mn in opex and bandwidth savings respectively), the increased scale and geographic reach should enable SDA to (i) add incremental revenue through global contract wins and expansion of existing relationships and (ii) drive down longer term bandwidth costs (and thus grow margins) via its increased buying power, with SDA now the largest commercial buyer of satellite capacity in the world. Figure 7: SDA Energy market share by revenue (2015 pro forma) c40-45% c35-40%% Figure 8: SDA Maritime market share by revenue (2015 pro forma) c20-25% c15-20% SDA CapRock Combined #2 player SDA CapRock Combined #2 player Source: Company data, RigNet, Credit Suisse estimates Source: Comsys, Company data, Credit Suisse estimates Attractive acquisition price We view the acquisition multiple as highly attractive at 7x LTM EBITDA pre-synergies or just 5x pro forma LTM EBITDA post synergies. This compares to a typical multiple including several recent deals over the past six years of 9-12x EBITDA. Industry Speedcast International (SDA.AX / SDA AU) 5

6 feedback and previous filings from Harris suggest that at peak the business was generating around US$100mn of annual EBITDA, suggesting that the current price represents a trough multiple on trough earnings. The low acquisition price appears to have been driven by Harris' need to quickly dispose of a non-core asset under pressure from activist shareholders and SDA's ability to quickly complete the transaction on a nonconditional basis (something that may have proved a challenge for a financial buyer, for instance). We further note that Harris acquired the two component parts of Harris CapRock (CapRock and GCS) for a combined US$900mn in While the oil & gas industry has undergone a downturn since that time and Harris kept some smaller parts of the business that provide services to government clients, the difference in earnings multiple remains stark (7x something approaching trough earnings vs 9x mid-cycle earnings in 2010). Figure 9: Satellite communications acquisition multiples 14x 12x 10x 9.7x 8.8x 10.1x 9.7x 8.9x 11.7x 12.6x 9.2x Pre- and post-synergies 8x 7.0x 6x 5.0x 4x 2x 0x Harris / CapRock (2010) Harris / Schlum GCS (2010) Airbus Sat Comms / Vizada (2011) ABRY Partners / EMC (2012) Wasserstein & Co / Globecomm (2013) Apax / Airbus Sat Comms (2015) SES / RR Media (2016) Global Eagle / EMC (2016) SDA / CapRock (2016) SDA / CapRock (2016) Energy sector slowdown putting revenue under pressure From a value creation standpoint, we view it as a positive that SDA is increasing its exposure to energy on a low multiple at a low point in the cycle. However, with the oil & gas industry still largely bouncing along the bottom (despite some green shoots in the back half of 2016), this does leave the business exposed to near-term earnings headwinds should the anticipated recovery get pushed out to the right. CapRock revenue is expected to decline 25% in 2016 and we project a further 5% decline in 2017F before a return to growth in 2018F. Figure 10: CapRock revenue (12m rolling) Figure 11: CapRock EBITDA (12m rolling) Dec-15 Jun-16 Dec-16F Jun-17F Dec-17F 2015 EBITDA Costs Revenue Jun-16 LTM EBITDA Costs Revenue 2016F EBITDA Source: Company data Speedcast International (SDA.AX / SDA AU) 6

7 Synergies to drive further margin expansion There are both operational and economic benefits to scale in the satellite communications services industry. As one of the largest commercial buyers of bandwidth globally, the combined business is well positioned to leverage its buying power and geographic reach to drive down bandwidth costs on a per unit basis. Rationalisation of operating costs offers further opportunity for margin expansion. At the time of acquisition, SDA estimated that it could generate $24mn of cost synergies by year two. This implies a c400bps expansion in EBITDA margin for the combined business within the first two years post acquisition. Note that this analysis ignores potential revenue synergies from SDA's increased scale, larger services portfolio, bigger geographic footprint and the removal of a major competitor from tendering situations. All of these factors could potentially drive additional incremental operating leverage. Figure 12: SDA pro forma LTM EBITDA inc synergies 8 16 Figure 13: SDA pro forma EBITDA margin 1.3% 2.6% % 16.5% 17.0% 20.9% 42 SDA CapRock Combined Bandwidth Opex Pro forma SDA CapRock Combined Bandwidth Opex Pro forma Increased energy exposure a risk and opportunity Oil & gas remains a challenged industry The depressed oil price over the last two years has led to a material drop in exploration activity. Despite a recovery in the oil price in the second half of 2016, it remains well below the 2014 peak. This has had a material flow on effect on services providers (including communications services) which can be easily seen in both the share price and operating performance of CapRock peer RigNet. RigNet revenue is projected to fall 23% in 2016 according to consensus before stabilising in Figure 14: WTI crude vs RigNet share price Figure 15: RigNet revenue and EBITDA (US$mn) $120 $60 $360m 20% $100 $50 $320m $280m 15% 10% $80 $40 $240m 5% $60 $30 $200m $160m 0% -5% $40 $20 $120m -10% $20 $10 $80m $40m -15% -20% $0 $ $0m F 2017F -25% WTI Crude (LHS) RigNet share price (RHS) Revenue EBITDA Organic Rev Growth Source: Bloomberg Source: Company data, Bloomberg. Note: Consensus forecasts Speedcast International (SDA.AX / SDA AU) 7

8 Some green shoots starting to appear but still near bottom of the cycle While conditions in the oil & gas sector remain challenging, some positive signals began to emerge in the second half of 2016 with the recovery in the oil price. The US rig count is up materially from mid-2016 lows (see Figure 16) although it remains around one third of peak and is heavily skewed towards onshore, with most deep water capacity still idled. Despite the uptick in overall rig count and the oil price, we expect that 2017 will be another tough year for many services businesses with heavy oil & gas exposure. We note that share prices for the oilfield services majors have now recovered to around 25% off peak, reflecting double-digit consensus revenue growth forecasts for However, share prices for offshore drilling contractors remain depressed, reflecting industry expectations that a rebound in deepwater activity is still some way off. This is relevant for SDA as it estimates deepwater rigs require 4-6Mbps of bandwidth vs <1Mbps for onshore rigs. Figure 16: US land and offshore rig count 2,400 2,000 1,600 1, Figure 17: Share price performance of selected oilfield services and drilling contractors Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 RNET SLB HAL BHI RIG SDRL Source: Baker Hughes Source: Bloomberg Increasing bandwidth requirements could drive yield in a recovery Capacity demand in the oil & gas sector on a per unit basis grew strongly through the peak driven by increased real time reporting and remote access/control requirements. RigNet's revenue per unit tripled from (31% CAGR). Unfortunately, offshore/onshore rig volumes have halved over the past two years after being consistently at c500 during that period (with deepwater particularly impacted). Although production and completion unit volumes have been more stable, bandwidth requirements for these units are lower, resulting in RigNet's revenue falling 23% in 2015 despite a seemingly stable total unit count. Figure 18: RigNet unit numbers Figure 19: RigNet revenue per unit 1,400 1,200 1,000 1,400 1,200 1, ,074 1,094 1,111 1,179 1, FY09 FY10 FY11 FY12 FY13 FY14 FY15 3Q16 0 FY10 FY11 FY12 FY13 FY14 FY15 0 Offshore Rigs US Onshore Rigs Production & Completion Vessels Revenue (US$m) Average Units US$k / Unit (RHS) Source: Company data Source: Company data Speedcast International (SDA.AX / SDA AU) 8

9 SDA well positioned to win share, expand margins longer term Following the acquisition of CapRock, we estimate that SDA has a 40-45% share of the market for the provision of satellite communications services to the oil & gas industry. In addition to being the largest player in the market, the combined entity is more than twice the size of closest competitor RigNet with a far greater geographic footprint. In our view this puts SDA in a strong position to win share from RigNet (and other smaller players) in competitive tender situations due to both a broader service offering and a more efficient cost base (note SDA's pro forma margins including CapRock synergies of 21% vs RigNet reported FY15 margin of 15%). We note that even prior to the CapRock deal SDA has had success against incumbents in competitive bidding situations (including against CapRock) and we expect SDA to be aggressive in seeking to take share from its major competitor which remains in a vulnerable position. While we see SDA's buying power as providing an opportunity for long-term margin expansion, we note that it could also use lower capacity costs as a way to buy share in the market. Either option has the potential to create long-term value, although we expect given SDA's generally aggressive strategic thinking that it will prioritise revenue growth. This would still enable SDA to increase pricing (and margins) down the road upon renewal as rig owners and operators have generally prioritised capability over pricing given the mission critical nature of reliable communications and relatively low cost (well under 1% of a rig's day rate). Figure 20: Oil & Gas industry VSAT revenue share ITC Global RigNet Other SDA inc CapRock Figure 21: Incremental EBITDA from market share gains/losses and margin increase/decrease Margin Improvement (bps) Share of industry tenders by revenue US$m 35% 40% 45% 50% 55% % on LTM PF 35% 40% 45% 50% 55% % -2.5% -0.3% 1.8% 4.0% 0-2.2% 0.0% 2.2% 4.4% 6.6% % 2.5% 4.8% 7.0% 9.3% % 5.0% 7.3% 9.6% 12.0% % 7.5% 9.9% 12.3% 14.6% % 10.0% 12.4% 14.9% 17.3% Solid outlook in maritime Source: Company data, Bloomberg. Note: Consensus forecasts CapRock increases exposure to most attractive maritime segment Around one third of CapRock's revenue over the past 12 months was generated in providing services to customers in the shipping and cruise industries. The transaction more than doubles the size of SDA's existing Maritime business, with the combined company now the global leader in maritime broadband services. Importantly, the addition of CapRock should improve the future growth trajectory of the Maritime business by increasing exposure to the most attractive segment of the market. CapRock is the largest global provider of communications services to the increasingly bandwidth hungry cruise segment. Industry forecasts suggest that revenue from cruise and other passenger vessels is expected to grow in the high teens over the next few years (see Figure 22). Speedcast International (SDA.AX / SDA AU) 9

10 Figure 22: Maritime VSAT industry revenue share (2015 pro forma) Figure 23: F maritime VSAT revenue CAGR by vessel type Globecom 4% Orange / FT 4% NSSL 5% EMC 4% Others CapRock 1% 15% 17.5% SDA 11% 12.4% 9.4% Inmarsat 10% KVH 12% MTN 14% Airbus D&S 20% -0.5% Passenger Merchant Offshore Total Source: Comsys, company data, Credit Suisse estimates. Pro forma for WINS transaction. Source: Northern Sky Research: Maritime SATCOM Markets 4th Edition Data Sheets. Note: Excludes Fishing which represents <2% of industry revenue. Increased demand for bandwidth driving growth In addition to being far more stable in terms of unit volumes than the energy sector, Maritime (in particular cruise ships) is an attractive end-user market due to the rapidly increasing bandwidth demands and expectations of end users. Cruise ships averaged roughly 8Mbps of connectivity two years ago; by the end of 2018 management expects this to be in excess of 50Mbps. Global passenger bandwidth demand is estimated to have nearly doubled in 2016 and is forecast to almost double again in 2017F. As a result, despite material price erosion on a per Mbps basis, overall revenue growth from the sale of connectivity to passenger vessels is expected to grow by more than 20% in Our current forecasts for the Maritime business call for medium-term revenue growth in the mid-to-high single digits, as there is a risk that an oversupply of satellite capacity results in higher-than-expected price erosion for end users. However, these estimates may ultimately prove too conservative (and we note that SDA historically delivered double-digit organic revenue growth for several years prior to 2016) should the demand for bandwidth continue expanding at the current rate. Figure 24: Global passenger vessel bandwidth requirements (Mbps) Figure 25: Global passenger vessel VSAT revenue growth 70,000 60,000 50,000 40,000 30,000 20,000 10, F 2017F 2018F 2019F Bandwidth (Mbps) Growth 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 80% 60% 40% 20% 0% -20% -40% 23% 23% 16% 9% 2016F 2017F 2018F 2019F Bandwidth Growth Price Erosion Revenue Growth Annual cost per Mbps ($k) $14k $12k $10k $8k $6k $4k $2k $k Source: Northern Sky Research, Management estimates Source: Northern Sky Research, Management estimates Speedcast International (SDA.AX / SDA AU) 10

11 Increased scale to benefit top and bottom lines Largest commercial buyer of satellite capacity in the industry Following the acquisition of CapRock, SDA is the world's largest commercial buyer of satellite capacity (with a large gap to #2 among the independent providers). In addition to raw capacity requirements, SDA's improved geographic spread post-deal also should also help its bargaining power and flexibility in negotiations. The timing of the deal could also benefit SDA with its buying power increasing substantially just as the satellite capacity market enters a period of oversupply (see next section). This flexibility and increased buying power could include outright volume discounts, pooling of existing contracts, exchanging capacity in one region for another or a number of other potential benefits all providing scope for rationalisation of capacity costs and thus higher gross margins. Positive near-term satellite capacity market dynamics Supply dynamics in the satellite capacity market are changing, with the market entering a period of oversupply (see Figure 26) driven by a cyclical upswing in launch numbers, launch of new high throughput satellites and the continuing operation of existing satellites beyond their original design lives (often at very cheap pricing). While growth in volumes has outstripped price erosion for satellite capacity in recent years, this may no longer be the case in the near to medium term due to the sharp increase in capacity. Satellite capacity is SDA's major cost line. A combination of growth in unsold capacity and SDA's significantly increased scale following the CapRock acquisition has the potential to materially shift bargaining power away from the satellite operators towards SDA. While lower capacity pricing could potentially lead to lower realised pricing for SDA as well, we view it as likely that SDA will be able to retain at least some incremental margin, especially with volume growth currently outpacing price degradation for mobile applications (e.g., maritime, energy, aerospace). We also note that in the energy sector in particular, communications services are a fraction of a percentage point of total costs for a rig (and may in fact be bundled into a larger package of services). This implies a greater ability to retain bandwidth savings, notwithstanding a potential lessening of cost pressures on rig owners/operators as the cycle improves. Figure 26: Global transponder incremental supply and demand (#) Figure 27: Illustrative gross margin impact of global capacity oversupply, improved bargaining position 1, Historical Forecast Incremental Supply Incremental Demand Current gross margin Incremental demand Price erosion Lower unit cost Higher capacity requirements Projected gross margin Source: Credit Suisse Europe Telecommunications Research, Proprietary Model, Jan 2016 Source: CISCO Speedcast International (SDA.AX / SDA AU) 11

12 An example of how an improved negotiating position with satellite operators might benefit SDA is the renegotiation of a material capacity contract disclosed in the presentation accompanying the CapRock acquisition announcement. SDA received a c20% discount on a major contract from 4Q16 for agreeing to pay up front and modestly extend an existing contract. While the accounting treatment is somewhat confusing (a $7.8mn EBITDA benefit in FY17 offset by a $6mn increase in depreciation of the capitalised lease), the transaction saves SDA a seven figure sum on a cash basis and adds c$1mn to FY17 NPATA. Increased geographic coverage and capabilities, less competition While we have largely focused on the change in revenue mix on an industry basis following SDA's acquisition of CapRock, another important aspect of the deal is complementary geographical overlap of the two businesses. The combined business now has strong physical and customer presence across all continents. The improved geographic coverage has clear benefits on both the cost and revenue side: Bandwidth costs: Separate from raw scale, the near-ubiquitous global coverage of the combined business is likely to deliver material bandwidth savings by: (i) enabling the sharing of existing capacity between the two entities; and (ii) minimising the need for expensive spot capacity purchases in areas of weak coverage. This is particularly relevant in the Maritime segment where vessels travel globally on a regular basis. Revenue: Improved geographic coverage both increases SDA's ability to tender for and win global contracts and enables it to credibly offer expanded services to existing customers. Figure 28: Speedcast and CapRock combined geographic coverage Source: Company presentation In addition to the benefits of scale and geographic reach on both the top and bottom line, it is also worth noting that the CapRock acquisition removes a major competitor in both Energy and Maritime. Given the competitive nature of the industry it is possible that consolidation will have a material impact on contract margins. For example, in Energy there are now only three major players (SDA/CapRock, RigNet and ITC Global), giving SDA a strong opportunity to either chase share at the expense of two weakened competitors, increase margins or both. Speedcast International (SDA.AX / SDA AU) 12

13 Earnings forecasts Synergies and accretive M&A offsetting organic softness in energy We forecast reported revenue to grow 38% to $232mn in FY16F, driven almost entirely by M&A. We estimate that organic revenue growth was c1%. SDA has typically delivered double-digit organic growth, however 2016 was a difficult year due to: (i) weakness in Energy driven by a difficult environment and higher-than-expected churn (now returned to normal levels); and (ii) softness in energy-related portions of the Maritime segment. Note that our "organic growth" includes incremental revenue growth/declines at acquired businesses and thus may not be reflective of organic growth as defined by management. For example, Newcom (acquired 2Q16) lost a major contract shortly post-acquisition while the contribution from Hermes (acquired March 2015) declined materially in FY16 due to that business' energy exposure. Given revenue from these businesses is included in our revenue bridge as disclosed at the time of acquisition, true organic growth on a like-for-like basis was likely higher than in our calculation. FY17F revenue of $571mn represents 146% growth vs pcp and is driven by CapRock and a full-year of revenue from ST Teleport and Newcom. We forecast c5% organic growth at SDA ex-caprock. On a pro forma basis we calculate that FY16F revenue declined c15% due to a c25% revenue decline at CapRock. We forecast pro forma revenue to be approximately flat in FY17F, with c5% organic growth at Speedcast and growth in CapRock's Maritime segment offsetting continued weakness in Energy. We project Energy to return to growth in FY18F, with 1H17 the 'trough'. Figure 29: SDA FY15-FY17F revenue bridge (reported basis) Figure 30: SDA FY15-FY17F revenue bridge (pro forma) $700m $600m $500m $400m $300m $200m $100m $0m $800m $700m $600m $500m $400m $300m $200m $100m $0m Backing out organic EBITDA growth at SDA is challenging given the number of acquisitions. We forecast FY16 EBITDA to grow 37% to $40mn, in line with company guidance. Stripping out c$10mn of acquired earnings and a c$2mn benefit from the renegotiation of a material capacity contract, we calculate that underlying EBITDA was approximately flat YoY (including c$4mn of synergies). FY17F EBITDA of $126mn (+215%) benefits from the inclusion of CapRock, c$17mn of synergies (including $15mn from CapRock) and the full-year impact of the renegotiated contract. On a pro forma basis including CapRock we calculate that EBITDA will fall c5% in FY16F due to lower earnings at CapRock before rebounding in FY17F (+12%) driven by an improved underlying performance and CapRock synergies. Speedcast International (SDA.AX / SDA AU) 13

14 Figure 31: SDA FY15-FY17F EBITDA bridge (reported basis) Figure 32: SDA FY15-FY17F EBITDA bridge (pro forma) $140m $120m $100m $80m $60m $40m $20m $0m $140m $120m $100m $80m $60m $40m $20m $0m Expect FY16/17 to be the 'trough' years for energy SDA said in its presentation following the CapRock acquisition announcement that overall CapRock quarterly revenue (including Maritime) is expected to be flat into FY17 with Energy revenue expected to bottom out in 4Q16. We forecast 1H17 revenue to be down c5% vs 2H16 before stabilising in the second half. This is broadly in keeping with industry commentary in the oilfield services sector calling for a recovery beginning in the second half of this year (with strength in US onshore and some international areas offsetting continued weakness in deepwater). Longer term, we remain relatively bullish on the organic growth opportunity within the Energy segment, especially given the low starting point. Our current base case forecasts assume SDA's Energy business returns to growth from FY18F driven largely by a cyclical recovery in the oil & gas sector. We have not assumed any material uplift in yields (i.e., bandwidth demand growth is wholly offset by price per Mbps erosion). This could prove conservative given the large increase in remote access requirements in the industry and the data requirements that this entails (e.g., placing technical staff in an office in Houston vs on a rig in the Gulf of Mexico to save on operating expenses). Industry trends such as this could result in higher per-unit bandwidth demand similar to that seen in Maritime (e.g., need for high bandwidth two-way connectivity vs lower historical bandwidth requirements for transmission of logging data etc) although this is likely to be offset by mix shift away from deepwater relative to the industry peak. We note that even with yields broadly flat, our forecasts may prove to be conservative given that US rig counts remain approximately two thirds below peak, implying that volume growth could ultimately be stronger even than the top end of our forecast range of 0-12% FY17-20F segment revenue CAGR. Our base case forecast is for 7% FY17-20F revenue CAGR in Energy. Our projected growth ranges for SDA's other key segments are as follows: Maritime: We forecast a 3-10% revenue CAGR for Maritime over the FY17-20F period, driven by rapid growth in bandwidth demand in Passenger (including cruise) and increased penetration of higher yielding VSAT solutions in Merchant (with penetration still under 20%). This forecast range (and especially our base case CAGR of c5%) could prove to be conservative given industry projections of 23% revenue growth in the key passenger and cruise segment in Enterprise & Emerging Markets: We forecast a 2-6% FY17-20 revenue CAGR range in E&EM, with solid growth in mobile services offset by headwinds in fixed line substitution. Speedcast International (SDA.AX / SDA AU) 14

15 This results in an overall FY17-20F revenue CAGR range of 1-9% (5.5% in our base case scenario). Figure 33: Pro forma Energy revenue and growth Figure 34: FY17-20F SDA revenue CAGR by segment $350m 10% 14% $280m 0% 12% $210m -10% 10% 8% $140m -20% 6% $70m -30% 4% $0m F 2017F 2018F 2019F Pro forma revenue (US$m) Growth -40% 2% 0% Energy Maritime E&EM Total Changes to previous forecasts Figure 35: SDA changes to previous forecasts We have made material changes to forecasts as a result of: (i) addition of revenue and earnings from CapRock; (ii) dilution due to the A$295mn capital raise that partially funded the acquisition; (iii) organic downgrades largely due to pushing an Energy recovery out into FY18; and (iv) incremental margin expansion due to synergies from the CapRock deal. We reduce FY16F EBITDA 3% to $40.1mn, in line with company guidance. This results in a 5% reduction in FY16F NPATA to $19mn, while EPS (ex intangibles amortisation) falls 11.5% to 13.6cps due to the lower earnings and dilution from the equity raising. FY16F FY17F FY18F New Old Diff. New Old Diff. New Old Diff. Revenue US$M % % % Gross Profit US$M % % % EBITDA US$M % % % EBITA US$M % % % NPATA Adj. US$M % % % EPS Adj. CPS % % % DPS A$ CPS % % % OCF US$M % % % Net Debt US$M % % % Net Debt/EBITDA x % % % Revenue Growth % 38.7% 41.8% -3.1% 145.8% 21.1% 124.7% 6.1% 5.5% 0.6% Gross Profit Growth % 39.9% 43.0% -3.1% 167.5% 23.6% 143.9% 8.2% 6.9% 1.4% EBITDA Growth % 36.7% 40.7% -4.0% 214.8% 33.0% 181.8% 14.4% 8.8% 5.6% EBITA Growth % 36.7% 42.1% -5.4% 168.9% 37.8% 131.2% 26.1% 12.1% 13.9% NPATA Adj. Growth % 28.6% 35.1% -6.5% 152.7% 39.8% 112.8% 34.6% 17.3% 17.2% EPS Adj. Growth % 12.3% 26.9% -14.6% 47.7% 29.0% 18.7% 34.3% 17.0% 17.4% Gross Profit Margin % 38.4% 38.4% 0.0% 41.8% 39.2% 2.6% 42.6% 39.7% 2.9% EBITDA Margin % 17.2% 17.4% -0.1% 22.1% 19.1% 3.0% 23.8% 19.7% 4.1% NPATA Adj. Margin % 8.2% 8.4% -0.2% 8.4% 9.7% -1.3% 10.7% 10.8% -0.1% Speedcast International (SDA.AX / SDA AU) 15

16 Figure 36: FY17 changes to forecasts detail We raise FY17F EPS by 1.3%, with accretion from the CapRock transaction offset by lower organic earnings at Speedcast (i.e., ex-caprock). CapRock: On a standalone basis (including year 1 synergies of $15m and a 5% YoY revenue decline) we calculate that the CapRock transaction is 9% accretive in FY17F. Organic earnings changes: We put through an 11% organic downgrade to earnings due primarily to a delayed recovery in the top line within Energy as we now expect FY17 to be the 'trough' year in the industry (partly offset by contract wins from other providers). This results in 5% and 12% cuts to underlying revenue and EBITDA, respectively. Capacity renegotiation: As a result of the capitalised capacity contract disclosed in the CapRock acquisition presentation, FY17F EBITDA increases $7.8mn and D&A increases $6mn. This adds c$1.4mn to NPATA, or 3% to EPS. Forecast NPAT on a reported basis (including amortisation of acquired intangibles) falls 28% due to the organic earnings downgrade and the accounting impact of the CapRock acquisition. Previous CSe 1. Raising 2. Organic 3. Capacity 4. CapRock New CSe Dilution Changes Renegotiation Revenue COGS Gross Profit Opex EBITDA Depreciation EBITA Net Interest Tax (adjusted) NPATA Amortisation (adj for Tax) NPAT WANOS (diluted) EPS EPS Impact -41.1% -11.1% 3.0% 50.5% 1.3% We raise FY18F EPS by 16.3%, driven by the following components: CapRock: We forecast FY18 accretion from CapRock (including total year 1 & 2 synergies of $24m) of 26.5%. We forecast 8% revenue growth at CapRock in FY18F. Organic earnings changes: We reduce 'organic' earnings by 13% in FY18F largely due to the lower base from FY17F as we push the recovery in Energy to the right by 12 months. Our forecast growth rate and margins for the underlying Speedcast business in FY18F are largely unchanged. We reduce underlying revenue and EBITDA by 6% and 15% respectively in FY18F. Capacity renegotiation: We carry forwarded the guided FY17F impact of the capacity renegotiation into FY18F as the forthcoming period of oversupply is likely to see SDA have opportunities to sign more deals on favourable terms. Speedcast International (SDA.AX / SDA AU) 16

17 Figure 37: FY18 changes to forecasts detail Previous CSe 1. Raising 2. Organic 3. Capacity 4. CapRock New CSe Dilution Changes Renegotiation Revenue COGS Gross Profit Opex EBITDA Depreciation EBITA Net Interest Tax NPATA Amortisation (adj for Tax) NPAT Shares Outstanding EPS EPS Impact -41.0% -12.8% 2.6% 67.5% 16.3% ND/EBITDA elevated at 3x pro forma 2016F; falls below 2.5x by Dec 2017 We estimate that December pro forma net debt to EBITDA will be approximately 3x, in line with guidance given at the time of the CapRock acquisition. This falls to 2.4x by the end of FY17F although we note that this is still above SDA's previously stated target gearing of 1.75x to 2.25x. The company has indicated that it will likely 'pause for breath' on the acquisition front following the CapRock deal due to the constrained balance sheet and materially higher integration requirements relative to previous bolt-on deals. However, given an aggressive management team and strong pipeline of potential acquisition opportunities, further transactions in the near term cannot be ruled out. Given an already stretched balance sheet, this would presumably mean tapping equity markets again. We view deleveraging of the balance sheet as a possible catalyst for a multiple rerating. Valuation Figure 38: SDA sum-of-the-parts valuation $4.10 target price, Outperform rating We value the core Speedcast business using a DCF methodology, with CapRock valued at the acquisition price adjusted for one year of synergies. This results in a $4.10 per share valuation. EBITDA EV/EBITDA Value Dec Y/E 2017F 2018F 2017F 2018F US$mn US$ Method Comment Speedcast ex-caprock x 9.4x $2.30 DCF 10% WACC, 3% TGR CapRock (incl synergies) x 6.1x $2.19 Multiple 7x LTM EBITDA incl year 1 synergies Enterprise Value x 7.5x 1,075.4 $4.49 Less Net Debt (332.7) ($1.39) 2016F pro forma US$333m Equity value (US$) $3.10 AUD/USD (Spot) 0.76 Equity value (A$) $4.10 We view this valuation as conservative given: (i) modest revenue growth assumptions relative to SDA's historical organic growth rate; (ii) the low acquisition multiple for CapRock Speedcast International (SDA.AX / SDA AU) 17

18 Figure 39: SDA Blue Sky / Grey Sky scenario analysis CapRock assumptions Speedcast organic divisional growth vs previous transactions in the space; and (iii) material leverage to an upswing in the oil & gas investment cycle. Indeed, we note that our Blue Sky valuation which incorporates a stronger recovery in the energy sector and realisation of incremental economies of scale on bandwidth purchases for SDA is $6.00 (see the next section for more detail). However, these factors must be offset against uncertainty around the timing of an energy sector recovery, significant integration risks and the difficulty in accurately forecasting earnings at a business with so many moving parts. We set our target price in line with valuation at $4.10. This results in an OUTPERFORM rating. Despite the near-term earnings risks from increased energy exposure and integration challenges, we view SDA as inexpensive on a 2018F P/E of c10x given the material upside if the company executes on its strategy as we expect. Note that while the roll-up of other industry players is a key component of SDA's strategy, we do not ascribe any explicit value to future acquisitions in our target price. Blue sky valuation of $6.00; Grey sky valuation $2.60 SDA's materially higher exposure to the cyclical oil and gas industry, increased scale and integration challenges result in a wide range of potential outcomes when assessing the medium to long term outlook of the business. As a result, we have looked at the sensitivity of our valuation to underlying assumptions regarding major earnings drivers. These scenarios give a valuation range for SDA of A$2.60 to A$6.00 per share. While we see the Blue Sky as more realistic than the Grey Sky given our view that Energy is coming off a very low base and underlying demand drivers in Maritime are likely to remain strong, we have not probability weighted these scenarios in arriving at a target price due to the inherent uncertainty involved in projecting a business with so many moving parts. Base Case Grey Sky Blue Sky $24m of cost synergies achieved over first two years No explicit revenue synergies 7% Energy CAGR FY17-20F 5% Maritime CAGR FY17-20F No underlying margin expansion FY20 EBITDA $96m inc synergies 7% Energy CAGR FY17-20F 5% Maritime CAGR FY17-20F 3% E&EM CAGR FY17-20F Bandwidth costs c200bps improvement FY20F vs FY16F due to scale Integration issues prevent synergy targets from being realised No recovery in Energy market; Revenue flat FY17-20F 3% Maritime CAGR FY17-20F Flat margins FY20 EBITDA $60m Lower growth as a result of continued down cycle in Energy and price degradation in Maritime and E&EM 0% Energy CAGR 3% Maritime CAGR 0% E&EM growth $24m of cost synergies achieved over first two years Incremental contract wins and revenue from improved coverage and reduced competition 12% Energy CAGR FY17-20F 10% Maritime CAGR FY17-20F 200bps improvement in margins post synergies from scale benefits FY20F EBITDA $125m inc synergies Sustained recovery in rig count and incremental demand outstripping lower unit bandwidth pricing 12% Energy CAGR 10% Maritime CAGR 6% E&EM growth Flat gross margins c400bps FY20F vs FY16F due to scale and oversupply in satellite capacity 2020F revenue $672m (5.5% FY17-20F CAGR) $589m (1.0% FY17-20F CAGR) $740m (9.0% FY17-20F CAGR) 2020F EBITDA $159m (23% margin) $121m (21% margin) $202m (27% margin) Valuation $4.10 per share $2.60 per share $6.00 per share Speedcast International (SDA.AX / SDA AU) 18