Satellite communications giant Inmarsat provides 24-7 global coverage via its fleet of 11 geostationary satellites to ships, aircraft, the armed forces, oil prospectors and many others working in even the remotest of regions. Customers include CNN, the BBC, disaster relief charities and British Airways.
The firm also maintains the Global Maritime Distress and Safety System (a worldwide ocean search and rescue service), that all ships over 300 tons have to join. For 2011, the company achieved sales of $1.4bn and earnings before interest, tax, depreciation and amortisation (EBITDA) of $854m – boosted by a $204m non-recurring gain from US wireless carrier Light Squared.
For income seekers, there’s a dividend of 40.36 cents, equivalent to a 6% yield. Yet over the past two years, the shares have halved in value. That’s thanks to a flagging marine sector, troop withdrawals from Afghanistan and the natural migration of customers from higher margin voice services to cheaper data tariffs.
This steep sell-off is odd, especially as the outlook seems to be improving. “We have more confidence than a year ago… with healthy growth in new subscribers and usage,” said CEO Rupert Pearce in May. “Strong subscriber growth of 10% continues to underpin our expectations for improved results in 2012.”
Inmarsat (LSE: ISAT), rated a BUY by AlphaValue
Looking further ahead, the group is planning to launch three new super-fast Ka-band satellites to offer rapid broadband. Pearce believes this will accelerate sales growth from 0%-2% over the next two years to 8%-12% from 2014 onwards. These new Global XPress satellites are being built by Boeing, and will be compatible with the US military’s exacting security requirements and fleet of aerial drones.
On such a depressed rating, the company may also become a takeover candidate for trade buyers such as EADS and/or General Electric. Even a private equity house could be attracted by its predictable income streams and excellent cash generation. I would value the group on an underlying EBITDA multiple of eight. Factoring in net borrowings of $1.35bn delivers an intrinsic worth of 525p.
Today’s price looks a good entry point into a top flight defensive stock in a secular growth industry.
AlphaValue has a target price of 712p, whilst interims are scheduled for 3 August.
Rating: BUY at 430p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.