With such strong fundamentals, surely this satellite communications provider’s shares are a buy? Sadly not, says Paul Hill – there are a number of potential banana skins on the road ahead.
Inmarsat (ISAT), tipped as a BUY by The Independent
Inmarsat is one of the world’s top mobile satellite communications providers. It owns and operates ten satellites covering about 85% of the world’s landmass and 98% of the population.
It offers telephone, fax and internet services to major firms in the media, maritime, oil and gas, construction and aeronautical industries, as well as to aid agencies and governments, where traditional communications are not available. Customers include CNN, the BBC, charities and the armed forces – all of whom need secure connectivity in remote regions.
First-half revenues rose 16% to $284m, delivering EPS of 14 cents. This double-digit growth was down to buoyant global trade boosting the maritime sector as more vessels were commissioned to deal with rising traffic. This type of service is now mandatory under international law for ships over a certain tonnage. More airlines are also using satellite technology to offer passengers inflight calls and web access. The majority of new long-haul aircraft being built by Boeing and Airbus are now fitted with antennae capable of accessing Inmarsat’s services.
With such strong fundamentals, surely the shares are a buy? Sadly not – there are a number of potential banana skins on the road ahead. As chief executive Andrew Sukawaty rightly points out, the firm’s success is “tied to the strength of world trade”. So if the global economy slows as expected, this will hit performance. As this is also a fixed-cost industry, if revenues moderate it will have a disproportionate impact on earnings.
Secondly, competition in satellite communications is growing from its three larger rivals (Thuraya, Iridium and Globalstar), with the cost of voice calls dropping to below $1 a minute. There is plenty of scope for further margin erosion ahead, which means the firm may have difficulty achieving its sales growth target of 6%-8% a year up to 2010.
Currency headwinds are a worry, too. Most of its turnover is denominated in US dollars, but around 60% of its cost base is in sterling. So even though this year’s numbers should be protected by currency hedges set at around $1.81 to the pound, 2008 could be much tougher if exchange rates remain at levels of above $2.05.
Most importantly, the valuation looks out of this world. The City expects 2007 sales and EPS of £271m and 9.6p respectively, rising to £296m and 10.4p in 2008. That puts the shares on very expensive forward p/e multiples of 48 and 45 times earnings. Last week, three directors, including the chief executive, sold big chunks of equity at 485p – banking nearly £9m in the process. I would advise investors to do the same.
Recommendation: SELL at 469p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments