Telco share price doubles with growing demand for data
Key statistics: ASX: SDA
Closing share price 04.07.17: $3.810 52-week high: $4.00 52-week low: - Most recent dividend: 2.4c Annual dividend yield: 1.47% Franking: 100%
SpeedCast International (ASX: SDA) is a company that doesn't grab many headlines but we think it's worth watching.
It is a leading global network and satellite communications service provider, and is strongly positioned to benefit from growing data demand.
Reflecting its potential, the share price has doubled over the past two years.
It purchases satellite capacity from satellite operators and resells satellite usage and telecommunication services to over 100 different customers.
Last year it did a transformative acquisition of Harris Caprock, which significantly increased its scale and geographical footprint. It now has dominant market share in both the maritime and energy verticals.
Technology automation, and our expectation of being constantly connected, increase the demand for data. Satellites are a fantastic way of providing data to remote or isolated places where other forms of communication are either not commercially viable or not possible.
The company is particularly well positioned in this market due to having strong economies of scale allowing for the business to spread its fixed costs. SpeedCast has indeed successfully used scale to its advantage by consolidating bandwidth usage - this has seen it improve margins annually, from 10.9% in the 2011 financial year to 17.5% in 2015 (all of this before the Harris Caprock acquisition).
As the largest net bandwidth purchaser, SpeedCast is able to negotiate flexible contract terms. For a given MgHz purchase, SpeedCast may be offered bandwidth across a network of satellites operating in different band frequencies and geographies.
This means it has a greater probability of onselling bandwidth to meet customer demands and can achieve a higher rate of bandwidth utilisation than competitors. This results in a lower marginal cost of doing business than its competitors, giving it a scale advantage.
Being the largest bandwidth purchaser in a fragmented market of satellite operators adds legs to SpeedCast calling out scope for "bandwidth cost saving benefits from volume oversupply" and "expansion in margin % from operating leverage and scale".