The Superloop Ltd (ASX: SLC) share price has taken a big hit since issuing a big profit downgrade yesterday. Here’s why I decided to hit the sell button…
Why I Bought Shares in Superloop
I detailed the reasons why I purchased shares in Superloop in this Rask Media article “Why I Bought Superloop”.
One of the key reasons was I believed Superloop shares offered “value”. To summarise, shares in Superloop were trading at a price-to-book (P/B) ratio of just 0.80x based upon 2018 reported Net Assets of $389.39 million and shares outstanding of 228.6 million.
This appeared to be cheap compared to its ‘peer group’ with Chorus Limited (ASX: CNU) and SpeedCast International Limited (ASX: SDA) having P/B ratios of 2.9x and 2.47x, respectively.
Interestingly, Speedcast just issued its own downgrade — sending the share price down nearly 40%!
The following video from Rask Finance explains ratio valuation in more detail.
Why I Sold My Superloop Shares
Yesterday, Superloop announced a huge earnings/profit downgrade which lead me to assess my original reasons for purchasing shares and whether I should continue to hold.
For the 2019 Financial Year, Superloop is forecasting $7 -$8 million in EBITDA, compared to guidance provided in February for $13 – $18 million (click here to learn what EBITDA means). The EBITDA outlook is nearly half of the lower end of prior guidance!
The updated forecast clearly left the market — and myself — in disbelief.
Further, I found the language used within the announcement to be worrying. The company blamed not completing a “significant commercial agreement” and that “if successfully concluded will be reflected in future earnings”. To have largely pinned earnings hopes on a single agreement and to have indicated little confidence in completing the deal is quite worrying.
While I still believe Superloop has excellent strategic assets, my confidence in the current management team has certainly diminished and is the reason why I hit the sell button.
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Disclosure: At the time of writing, William does not own shares in any of the companies mentioned.
