Speedcast International Limited

Revised Guidance for 1H19 and FY19: Speedcast International Limited (ASX: SDA) is engaged in the provision of remote communications and IT services through Network Services, Value Added Services, Professional Services, Wholesale Voice, Equipment Sales, and System Integration. For FY18, top-line posted a growth of 21%, including 5% organic revenue growth, and Underlying EBITDA increased 7% on pcp. The company recently announced that Norges Bank has ceased to be a substantial holder of the group on 19 July 2019.
 
On 02 July 2019, the company announced its updated expectations for the first half of 2019 and FY19, which are revised downward due to the emerging market conditions and recent commercial developments. For 1H19, SDA estimates the underlying EBITDA to be in the range of US$60 to US$64 million. This projection includes the expected earnings from the recently acquired Globecomm to be in the range of US$8 to US$10 million (from the earlier expectation of c.US$12 million, owing to delay seen in Government systems integration projects, higher churn resulting in lower sales in Maritime, and late new business wins. At the end of June 2019, the Management expects proforma net leverage to be in the range of c.3.5x to 3.6x against 3.5x seen at the end of December 2018.
 

2018 Financial Snapshot (Source: Company Reports)
 
Considering the Year-to-Date (YTD) behavior of the business and revised 1H19 outlook, the company expects FY19 Underlying EBITDA to be in the range of US$140 million to US$150 million, down from the previous guidance of US$160 to US$171 million. The revised guidance is owed to Globecomm for which FY19 Underlying EBITDA is expected at ~US$21 million, down US$5 million from the earlier expectation. The company is extremely confident of achieving this revised outlook for FY19.
 
Going forward, SDA expects to receive the advantage of the integration of Globecomm from fiscal 2020. Moreover, the company has been restructuring the organization from January 2019 and the benefits are anticipated to be visible in years to come. SDA has projected that the benefits of re-organization initiatives will be in the range of US$5 to US$10 million in 2H19 and US$20 million in FY2020. The company has been streamlining its business to become cost-effective.
 
SDA, in the first half of 2019, has faced a challenging environment in Enterprise & Emerging Markets (EEM). The implementation of present backlog slowed down due to weaker market conditions. Also, SDA did not receive the anticipated revenue on time under Phase 2 of the NBN project in the period. Furthermore, SDA faced technical difficulties for completing the Carnival contract. For energy, SDA expects the revenue to decline till 2020 due to social problem in Mozambique. Maritime business is likely to post a modest growth of less than 5% in FY19.
 
Stock Recommendation: EEM (excluding NBN) is likely to witness a lower revenue growth in FY19 along with the below 5% revenue growth from Energy for the same period. Revenue from Government is anticipated to post growth in mid-single-digit percent. Meanwhile, the stock is trading at $1.915, with the annual dividend yield of 3.75%. The company paid a dividend of 4.8 cents on 23 May 2019. For 2019, the company may adjust the dividend for deleveraging.
 
The stock has fallen ~44.51% and 52.12% in last one month and three months, respectively due to the downward revision of 1H19 and FY19 earnings guidance. The company anticipated all the market conditions, changes in business dynamics and the cascading impact on the earnings. We are of the view that the witnessed sharp fall in the share price in the recent past has already digested most of the negative factors and further steep downfall might be negated at the current level. Hence, we recommend a “Speculative Buy” rating on the stock at the current price of $1.915, down 0.26% as on 23 July 2019.
 
 

InvoCare Limited

Unsatisfactory Performance in FY18: InvoCare Limited (ASX: IVC) is the leading provider of services in the funeral industry in Australia, New Zealand and Singapore.

The company recently signed an agreement for the acquisition of Australian Heritage Funerals, based in Toowoomba Queensland. The company plans to expand its market share through the acquisition of Australian Heritage Funerals which is known by the brand Hiram Philp Funerals and the Toowoomba Garden of Remembrance memorial park. The company expects this acquisition to be completed by the end of July 2019. Further, Australian Heritage Funerals performs about circa 300 funerals every year and post annual revenue of ~AU$2 million.
 
In FY18, the company experienced a challenging environment, and therefore, operating earnings declined 22.1% to $49.5 million and statutory profit after tax fell 57.7% to $41.2 million. However, in the first quarter of 2019, the situation improved with 7.8% rise in the group revenue, 22.2% increase in the operating EBITDA & 9% growth in the operating earnings after tax.


Unaudited Results summary for the quarter ended 31 March 2019 (Source: Company Reports)
 
Stock Recommendation: At the current market price of $15.29, the stock is trading at a price to earnings multiple of 40.08x. The stock is currently trading slightly towards its 52-week high of $16.770 after rising 48.09% on a YTD basis. The company has paid a dividend of 19.5 cents on 12 April 2019 and has an annual dividend yield of 2.44%. IVC’s dividend payout is more than 75% of the operating earnings after tax. The company has not given the forecasts for the full year 2019 due to difficulties associated with accurately forecasting winter trading. The company will release its half-year results ending 30 June 2019 on 15 August 2019. On the valuation front, its EV/EBITDA and Price/Cashflow multiple for TTM stand at 17.4x and 25.0x, higher than the industry median of 13.6x and 29.0x, respectively, indicating an overvalued position at the current juncture. Hence, considering the average performance in FY18, higher valuation at the current level, absence of business outlook, etc., we suggest investors to avoid the stock at the current price of $15.230, up 0.528% as on 23 July 2019.
 

Rural Funds Group

Reaffirmed its forecast for FY19 AFFO and DPU: Rural Funds Group (ASX: RFF) is engaged in the leasing of agricultural properties and equipment. The Group is a lessor of agricultural property with revenue derived from leasing almond orchards, macadamia orchards, poultry property and infrastructure, vineyards, cattle properties, a cotton property, agricultural plant and equipment, cattle and water rights.

The company announced a 100% unfranked dividend of AUD 0.02607500 on the fully paid ordinary shares which will be paid on July 31, 2019.

1H19 Performance Highlights: In the period, RFF reported a 7% increase in the adjusted funds from operations (AFFO) to 6.4 cpu and 4% increase in the distributions per unit (DPU) to 5.22 cents. On the other hand, the company has been in a buying spree as between August 2018 and February 2019 as it has signed an agreement for the acquisition of four additional cattle properties and one cotton property.


1H19 Income and earnings metrics (Source: Company Reports)
 
Going forward, for FY19, the Management has reaffirmed its forecasts for Adjusted funds from operations (AFFO) and Distributions per unit (DPU). The company expects FY19 AFFO to be of 13.2 cpu and distributions to be of 10.43 cpu, reflecting the growth of 4% as compared to FY18. The estimated FY20 DPU of 10.85 cents is also consistent with the company’s DPU growth target and reflects the growth of 4% compared to FY19.


Forecasts (Source: Company Reports)
 
Stock Recommendation: The stock has risen 7.14% in the last three months and 18.23% in the last 1-year, showing decent returns over the said period. Annual dividend yield for the stock comes in at 4.35%. Currently, the stock is trading close to a 52-week high level of $2.42 with PE multiple of 18.0x. Hence, considering the aforesaid facts and current trading level, we give a “Hold” recommendation on the stock at the current price of $2.36, down 1.667% as on 23 July 2019.

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