24-Aug-2020:  FY20 Results Presentation   plus   Full Year Statutory Accounts   and   Auditor Limited Liability Disclosure Statement in Accounts

Highlights:

• Achieved midpoint of guidance EBITDA of $13.5 million ($8.5 million in FY19) and $107.6 million of total Group revenues.
• Core fibre connectivity revenues (excluding INDIGO development revenue and design & construction revenue) up 37% year-on-year to $38.0 million.
• Continued strong fibre connectivity recurring revenue sales trajectory, with 46% year-on-year growth.
• Strengthening of the balance sheet through the successful recapitalisation completed September 2019, reducing capital expenditure and transitioning to positive operating cash flow, producing a reduction in gearing ratio to 8.4% (FY19: 16.9%).
• $50m reduction in capital expenditure (~70%) year-on-year (excluding IRUs), as a result of major network infrastructure completed in FY19.
• Continued improvement in cost base delivering a 14% reduction in operating costs (excluding AASB16 Leases Impact).

I've been negative on SLC for a couple of years, particularly since Drew Kelton took over as CEO in July 2018, after Bevan Slattery stepped back into a more "strategic" role, rather than being a frontline manager.  After listening in on an analyst/investor briefing soon after Drew took on the top job, I soon formed the opinion that he was likely to be more of a liability to SLC than an asset.  After threatening to not pay for the teleconference bill after some technical issues, he got annoyed with a couple of the analysts suggesting that they were asking him to to do their job - i.e. providing opinions and forecasts for the company.  It struck me as a perverse way to try to garner interest and approval for what was still a fledgling company trying to get on more people's radars.  I was also concerned about a number of key personnel leaving the company around the same time, which suggested to me there was more going on than we knew, and that it wasn't all good.  At the time I was sitting on a decent profit with my SLC position, so I sold and locked in that profit. 

I sold my SLC shares for $2.45/share on July 2nd 2018, the day after Drew Kelton took on the CEO job.  They then drifted South East for the next 18 months, to end up at 87c/share (-64%), and then they got coronered down to a 52 cps low on March 23rd.  They're back up to $1.22 now - well, they were yesterday, they are down about -7% today on this report - and currently trading at $1.13 to $1.14, less than half of what I sold them for.

Interestingly, they announced on 12th August (12 days ago) that they have appointed a new CEO, Paul Tyler, who comes to Superloop with more than 25 years’ experience in senior leadership roles, most recently as Chief Customer Officer of NBN Co Ltd (“NBN”) responsible for scaling its aspirations in the business, enterprise and government markets, and previously as Group Managing Director, Telstra of both its international business and mid-market segment (Telstra Business). Prior to this, Mr Tyler was President, Asia Pacific and Japan, Nokia responsible for leading Nokia’s businesses across the Asia Pacific region.

On the 12th, Superloop Non-Executive Chairman, Bevan Slattery said, “I am delighted to have secured Paul as CEO. He is uniquely positioned to understand the challenges and opportunities that the National Broadband Network offers enterprises and service providers looking to leverage this once in a lifetime opportunity to transition away from traditional networks.”

Commenting on his appointment as CEO, Mr Tyler said: “I look forward to working with the fantastic team at Superloop to further grow the business, leverage its significant core assets and capabilities, and continue to build on the technical leadership that the Company has become renowned for. With the unstoppable rise of the cloud, software defined wide area networking (“SDWAN”) and of course the NBN, the business market is experiencing a once in a generation disruption that Superloop is uniquely positioned to take advantage of. For the first time, the internet has enabled all businesses from the smallest to the largest to access the productivity improvements that enterprise grade applications enable – Superloop is set to be a strong catalyst of this change.”

Mr Kelton will commence an orderly handover process with Mr Tyler on 1 September, with the CEO change taking effect from 1 October 2020.  Mr Kelton will stay on as an Executive Director until March 2021, to focus on Superloop’s international business, and then transition to a Non-Executive Director role thereafter.

That's a positive in my book.  And they've reduced their spending.  And their debt has reduced.  And their EBITDA was up +58% on the pcp, albeit off a very low base - FY20 EBITDA of $13.5 million compared to $8.5 million in FY19.  I guess it's not too hard to get a good percentage uplift when your pcp figure was just $8.5m - from revenue of $120m.

However there are still some negatives.  Such as:  Ordinary Revenue was down -9%.  Total Revenue was down -10%.  And they are still NOT profitable.  They are moving in the right direction - their loss for FY20 was ~$41m vs. ~$72m (loss) in FY19, but they don't look to be at or near a positive inflection point yet.  And - their Net Tangible Assets (NTA) per ordinary share was $0.43 at 30-Jun-2020, down 1c from the $0.44 NTA they had on 30-Jun-2019.

I think SLC have built up a useful suite of assets, particularly their undersea cables and their cable networks in various Australian and Asian cities, however, I remain of the view that the best outcome for shareholders is probably for them to be taken out by a larger player for a decent premium.  Which certainly is one possible outcome.  I would rate that as a better than 50% chance actually.  However, SLC serves as a useful example that not everything that Bevan Slattery touches necessarily turns to gold, and not every company that Slattery is a substantial shareholder in will prove to be a good investment.  If you got into SLC in August 2016 when they were $2.90 or any time in 2017 when they were always above $2.20, then a takeover now would be unlikely to deliver you a profit on your SLC investment, even if the takeover was at a 50% premium to the current sub-$1.20 SP.  And Slattery still owns 24% of SLC.

Contrast that with Megaport - MP1 - which has shot the lights out.  Slattery has now reduced his position in MP1 down to just 8.5% (latest sell-down was from 12.5% to 8.5% on May 21st this year).  I think Slattery might agree with me that MP1 is looking quite expensive at current levels - he was selling down (taking profits) at $13.05 to $13.80 (in that range) and MP1 are now $16.90/share as I type this (up another +6.6% today so far).

Slattery would probably argue that there is more value in SLC, and I would agree with that.  Hence - he still owns 24% of SLC.  I think that most of the bad news - and the major spending - is likely to be behind Superloop now, and they might be worth taking a small to moderate position in again, but I may wait a bit longer, to see how the new guy (Paul Tyler) works out for them.  He doesn't officially take over until October.

Superloop is another Bevan Slattery company.  Bevan has founded or co-founded a number of succesful Australian listed and unlisted IT & Telco companies, including PIPE Networks which grew to become Australia’s largest Internet Exchange and Australia’s third largest metropolitan fibre network provider with over 1,500km of fibre in 5 cities connecting 80 data centres, 250 Telstra exchanges and over 1000 buildings. In 2009, PIPE Networks completed construction of Pipe Pacific Cable 1 (PPC-1), a $200 million submarine cable system linking Sydney to Guam. PIPE Networks was sold to TPG for an enterprise value of $420 million in May 2010.  Bevan went on to found NextDC (NXT), then Megaport (MP1) and SuperLoop (SLC).

I've held shares in NXT, MP1 and SLC, but hold none of those stocks at this point in time.  SLC is creating a substantial network of telco assets within Australia, Hong Kong & Singapore, but also laying subsea cables to connect all of these places together using the latest available technology.  See here for their website.

I have some concerns about the management at this point, but I'll talk about that in a Bear Case thread.

This is straw #3 (of 3) in my bear case for SLC.

The key executive departures and the founder stepping down as CEO at SLC (and back into a lesser role) reminded me a lot of what happened last year at Vocus (VOC), another Telco.  Interestingly, Matt Hollis held much the same role at VOC (that he did at SLC) and Matt was one of the first off that ship.  Matt quit as Vocus' corporate and wholesale Director of Sales and Marketing in late 2016 when the VOC share price had already more than halved from over $9 to just under $4 - see here, after 6 years at Vocus.  He moved across to Superloop, and has now left Superloop after less than 2 years.  VOC's SP continued to decline, bottoming out in the low $2s in April this year.  VOC had a number of issues, but they weren't helped by their $1 billion of debt and an ND/E ratio of over 40%.  

VOC has a market capitalisation of over $2 billion, and SLC is a lot smaller - closer to $400m, and SLC has a LOT less debt, however their debt is gradually increasing.  SLC was in a net cash position in 2015 and 2016, and then moved to an ND/E ratio of 7% in 2017, and 12% in 2018.  They have now increased their debt facilities by another 50% (from $80m to $120m).

I could be jumping at shadows here, but I think SLC has some issues at this point, and I can't really put my finger on exactly what they are yet.  Call it a gut feeling (intuition if I was female) but I'm happy to stay on the sidelines with SLC right now.  There are too many people leaving the company or stepping back into lesser roles, I don't like their new CEO (and I don't think many analysts or brokers do either), and I feel that they are in a position now where they are spending a lot of money on infrastructure, particularly the Indigo subsea cable rollout, and there is the potential for significant cost blowouts to occur.  I also don't like the way they release bad news, like executive departures.  It's always burried deep in announcements after a heap of positive news (or spin).  Trustworthy and competent management is a key focus of mine and I'm not as confident in the management at Superloop as I once was.

For now, I'm out, but I reserve the right to change my mind.

It's not all bad news - see here - and Superloop will get taken over by a bigger player one day, just as PIPE Networks did.  What Slattery has built, and SLC are continuing to build, has real value.  I'm just not sure that it's one of the very best opportunities in the market for me right now.

This is straw #2 (of 3) in my bear case for SLC.  In that 02-Jul-18 update (see here) Superloop also announced that:

• Executive Director and Group GM Sales and Marketing, Mr Matthew Hollis, has also decided to step down from his executive role with Superloop. He will assist in the transition of the sales team over the next 3 months.
• Mr Kelton said, ‘Matt has done a terrific job since joining the Company in March last year, leading the establishment of a structured and focussed sales organisation driving the Group’s product and revenue growth. We look forward to continued association with Matt and wish him well.”
• Both Jason and Matt will remain as Directors of Superloop Limited.

Jason subsequently quit the board (resigned as an SLC director) on 30-Sep-18.  Matt left the company in September.  They also announced the establishment of a Risk Management Committee (on 02-Jul-18).

On 20-Aug-18, SLC released their FY18 full year results - see here - which included this announcement:

• After two and a half years with Superloop, Group Chief Financial Officer Paul Jobbins has tendered his resignation and will be finishing his employment during September 2018. We thank Paul for his contributions and efforts since joining in 2016 and wish him every success in his new role. Paul will participate in Superloop’s FY18 annual results presentations as usual.
• The Company is actively engaged in an executive search and we expect to announce the appointment of a candidate shortly.  Paul will also step down as Superloop’s Company Secretary during September. Superloop will announce the appointment of a replacement Company Secretary prior to his departure.

During the results conference call, Drew was clearly annoyed that Paul wouldn't tell him where he was going.  On 05-Sep-18 SLC announced Jon Tidd as their new CFO - see here and here.  On 20-Sep-18, SLC announced the appointment of Ms Louise Bolger as Company Secretary and that Paul Jobbins had now gone.

During August, Jason Ashton sold 352,604 SLC shares at $2.29 (average) which was 26% of what he held at that time.

During September BlackRock Group increased its SLC stake from 5.3% to 6.38%, and Smallco ceased to be substantial shareholders of SLC.

On 15-Oct-18 SLC announced that it had rolled its ANZ $80m secured debt facility (which had been due to mature in Oct 2019) into an ANZ-WBC facility that now totals $120m (WBC providing the additional $40m)  - see here - with a maturity date of Oct 2021.

Continued...

Superloop has announced some management changes this year, starting on 26-Mar-18 with the appointment of Drew Kelton as their new CEO (see here), with SLC founder Bevan Slattery stepping back into an executive director role, "allowing him to focus on strategic priorities for Superloop".

Drew has plenty of global Telco experience, but he comes across as a hard-headed northern Englishman who likes to stamp his authority.  In one particular conference call I listened in on, he was clearly disgusted with the issues that the conferencing services provider was having and joked that Superloop would NOT be paying their conferencing bill.  He has a dry sense of humour (if he has one at all) so it just came across more as a threat than a joke.  He was also a little terse with some of the analysts, at one point claiming that one analyst was trying to get Drew to do his (the analyst's) job for him, because of the nature of one of the questions, the inference being that SLC would give them some details but it was the analysts' job to put all the pieces together and to form their own views on the company and its future outlook.  This was not something I'm used to hearing, as most CEOs (especially the ones running the smaller companies) are very keen to paint their company in the best possible light and never shy away from expanding on future opportunities and where they see company being in the future.  Drew has a more combative approach.

Anyway, that was followed - on 04-Apr-18 - by this Investor Strategy Briefing Presentation, then the SkyMesh Fixed Line Customer Base acquisition on 12-Jun-18 - see here - and then a 02-Jul-18 Company Update - see here - which was full of news.  It started by reminding us of their new CEO, Drew Kelton, and said that Bevan Slattery's new Executive Director role would allow him to "focus on strategic priorities and to lead the Company’s innovative approach to technology and systems."

Next was updates on the Indigo Cable System manufacturing, Southern Cross Cables capacity upgrade, NBN Integration news and their Superbb rollout.  They also snuck in the news that Jason Ashton, the co-founder of BigAir (aquired by SLC) had for personal reasons decided to step down from his executive role but would continue as a director and consultant with particular focus on NBN integration.  On 01-Oct-18 SLC announced that Jason had quit the SLC board as well, effective from the previous day.

Matt Hollis was also jumping ship [continued - next straw]

Apart from the Key-Man risk, with a number of senior executives leaving the company, and Bevan Slattery stepping back into a more "Strategic" role (less "hands-on"), and their new CEO, who appears to have a different style to Bevan, (all outlined in more detail in my 3 Bear Case straws), there is significant execution risk.

They have already created a substantial network, but they are still spending millions, with the largest capex project currently being the Indigo West subsea cable rollout between Perth and Singapore via Jakarta.  They have already completed the Perth to Christmas Island leg, which is 2,400km long, but there's still a long way to go - see here and here.  They are currently laying the cable between Christmas Island and Jakarta.  Once Indigo West is completed (all the way to Singapore), they will start on Indigo Central, which is another subsea cable to be laid between Perth and Sydney.

Indigo is a consortium of AARNet, Google, Indosat Ooredoo, Singtel, SubPartners and Telstra.  SubPartners is a fully-owned subsidiary of Superloop (SLC).  There is a little more here about Google's involvement and plans.

The following diagram shows how Indigo will fit in with Superloop's existing network, and their future plans:

As well as their involvement in these subsea cable rollouts, Superloop is also spending more on onshore infrastructure in Australia, Hong Kong and Singapore, as described in their latest Annual Report - see here.

While Superloop certainly have significant infrastructure already in place, they aren't slowing down on their spending, as evidenced by their increasing debt profile, as I also explained in my Bear Case straws.  While they still have relatively low debt, that debt has increased each year for the past 2 years, and they have recently increased their debt facilities by another 50% (from $80m to $120m) via a new facility with Westpac (ANZ is their other main bank).  Because of this, I don't consider that Superloop is a company that has already spent the money and now just has to make the sales.  Three years ago, Superloop had zero net debt.  That is no longer the case, and they are taking on more debt this year.  While their ND/E ratio is still quite low at this point, the risks are increasing in my opinion, not decreasing.  And their head of Sales and Marketing (Mathew Hollis) recently quit and has now left the company, after less than 2 years with Superloop.  There are significant risks here.

01-Jul-19.  While FY20 got off to a reasonable start today - for most ASX-listed companies, there were exceptions, and two of those were Adacel Technologies (ADA) who dropped a bee's whisker below 32% on an FY19 guidance downgrade that left us in no doubt that they have very sub-par management there (their guidance is now for a FY19 loss) - and Superloop (SLC) who had an interesting FY19 Earnings Guidance "Update" of their own:

Superloop Announces Updated FY2019 Earnings Guidance

Superloop Limited (ASX: SLC) (Company) refers to its “H1FY19 Investor Presentation” (Presentation) which was released to the market on 25 February 2019 and included guidance for the 2019 financial year of statutory EBITDA of between $13 million and $18 million. This guidance was predicated on a number of factors, including that certain transactions were expected to complete and be recognised this financial year.

Despite its expectations to do so, the Company has not completed negotiations before 30 June 2019 to secure a significant commercial agreement which would have contributed the anticipated EBITDA to achieve its guidance for this financial year. Accordingly, the expected EBITDA for FY2019 is now likely to be lower than that set out in the Presentation, and subject to the finalisation of June’s trading figures and completion of its audited full year results, in the range of approximately $7 million to $8 million (including approximately $1 million of restructuring costs from February 2019).

Negotiations with parties will continue and if successfully concluded will be reflected in future earnings.

The Company notes that throughout the financial year it has continued, and expects to continue, to monetise its extensive Asia Pacific assets in a number of ways including long term indefeasible rights of use agreements, whereby the cash is often received upfront, but revenue recognised over the life of the contract.  In addition, the Company has also reduced a minority equity stake it held in a non-core asset which further strengthens its balance sheet.
 
With respect to the Company’s secured debt facility, the Company advises that it has actively engaged with its lenders to ensure that its revised guidance is within the terms of the debt agreements.

The Company anticipates releasing its full year results for FY2019 in the week commencing 26 August 2019 and will continue to keep the market informed with any further developments in accordance with its continuous disclosure obligations.

--- ends ---

Disclosure:  I don't hold SLC shares - as explained in my 3 "Bear Case" straws and also in my "Risks" straw.  Too many red flags, including a number of key personnel leaving the company throughout 2018, the founder (Bevan Slattery) stepping back from the controls, and the new CEO/MD, Drew Kelton, being a bit of a prick. 

They also increased their debt profile last year (took on 50% more debt), and without the expected profits to service and reduce that debt, they now have to worry about the possibility of breaching lending covenants (which would be included in those "debt agreements" that SLC refer to in this "update").  They may not have breached any yet, but it does highlight how easily you can lose control of your own destiny when you're a relatively small company and have significant debt.

In closing, does this ring true to you?  They were unable to close the deal on one significant commercial agreement before June 30th, and as a result of that, they have gone from guidance of statutory EBITDA of between $13 million and $18 million to now being $7 million to $8 million (including approximately $1 million of restructuring costs from February 2019).  Really??  That must have been a VERY significant agreement, because that profit guidance has just halved!

I would suggest that what ADA and SLC currently have in common is management that you just can't trust.  I'm not saying they're incompetent, although that is probably a strong possibility.  What I'm saying is that when they promise something, or provide guidance, you just can't trust them.  And it's often best to avoid companies that are in a downgrade cycle.  There are often at least three consecutive downgrades before the tide turns positive, and that's IF the tide does turn.  It sometimes doesn't.

Additional:  That's why I tend to sell out immediately when a management team does anything that makes me think I can't trust them any more.  It happened with Dacian Gold (DCN) last month, a massive production guidance downgrade for both the June quarter & for FY20;  I sold out immediately - at $1, where they opened when they resumed trading after the downgrade.  They finished that day down 67% at 51.5 cents.  In a further omen, and an ominous one, DCN fell 66.6% in June on the back of that downgrade.

Today (Tues 2nd July 2019) we have another big earnings guidance downgrade - this time from SDA - Speedcast International (see here) and they finished at $2.06 - down -40.8% from their $3.48 close yesterday.