Turkey of the week: risky satellite operator

By Paul Hill Oct 30, 2009

Paul Hill

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Inmarsat is one of the world's leading providers of mobile satellite communications. It owns and operates 11 satellites in geostationary orbit (35,786km above the Earth) providing global coverage. It offers voice, data and high-speed internet services to the government (40% of sales) and private-sector firms operating in the maritime (50% of turnover) and remote land and aeronautical industries.

Furthermore, Inmarsat maintains the Global Maritime Distress and Safety System, a worldwide ocean search and rescue service that all ships over 300 gross tons are required to join. Customers include CNN, the BBC, disaster relief charities and the armed forces.

First-half revenues rose 4.9% to $509m, delivering earnings per share of 16 cents – a creditable result, given the negative impact of Iraqi troop withdrawals and reduced sea traffic. This growth came from the launch of new products, such as mobile broadband, which enables TV broadcasters to beam breaking news live via videophone into millions of homes. Demand is also growing from airlines (such as Emirates and Ryanair) who wish to offer passengers inflight calls and web access.

So, why aren't the shares a buy? Firstly, as CEO Andrew Sukawaty rightly points out, the firm's success is "tied to the strength of world trade". If there is a double-dip recession, performance will suffer. Given that this is a hugely fixed-cost industry, a revenue decline would have a big impact on earnings.

Inmarsat (LSE: ISAT), rated a BUY by Goldman Sachs

Secondly, competition from its three main rivals – Thuraya, Iridium and Globalstar – is intensifying, with the cost of voice calls drifting below $1 a minute. New technology is catching it up, such as the re-emergence of a cheaper modern version of 'CB radio' for ships. Finally, and most importantly, the valuation looks stretched. The City is pencilling in 2009 sales and EPS of £634m and 21.0p respectively, rising to £667m and 26.5p in 2010. This puts the shares on p/e ratios of 26.7 and 21.1. I'd value the group on an eight times EV/Ebitda multiple, which, after adjusting for the $1.4bn debt pile, gives an intrinsic value of just 450p a share.

One reason for the premium rating is that the City is convinced that its largest shareholder, US hedge fund Harbinger, with a 28% stake, will soon submit a takeover bid. While this might happen, Harbinger received a body-blow last week when it was forced to write-down its holding in Tate & Lyle. That happened because the shares it owns could not be recovered from the Lehman Brothers liquidation. Harbinger used the collapsed bank as a custodian for some of its assets.

If its stake in Inmarsat is also caught up in the bankruptcy proceedings, any planned deal could be scuppered too. It's also worth noting that disasters do sometimes occur in space. For example, earlier in the year there was a crash between an American communications and a defunct Russian satellite. Given these risks, and that senior directors recently disposed of 250,000 shares to bank £1.3m, I would take profits. Third-quarter 2009 results are due out on 11 November.

Recommendation: SELL at 570p

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Published in Tips & advice | More articles by Paul Hill

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