|Shares Out. (in M):||96||P/E||0||0|
|Market Cap (in $M):||5,400||P/FCF||0||0|
|Net Debt (in $M):||400||EBIT||0||0|
EchoStar (SATS) was written up in September 2016 by of21. They did a great job highlighting the value of the company. We think that several important events since that write-up have happened and that the stock remains undervalued and, in many ways, is even more attractive today. We will use this write-up to point out these events and share our valuation work. Since of21’s write-up provides an excellent summary of the background on the company, this write-up will focus on the developments since then.
When of21 wrote up SATS in 2016, the company had 3 divisions. In February 2017, the company consummated an asset swap transaction with DISH Network, which transferred the EchoStar Technologies division to DISH in exchange for its Hughes retail tracking stock. As a result, SATS no long owns a declining set-top box business and now owns 100% of a growing consumer broadband business. Most followers of the company saw this transaction as a positive because SATS received a fair price for EchoStar Technologies while at the same time acquiring a faster growing business. The transaction also made the company more of a pure-play on satellite communications and reduced the company’s overall complexity.
In April 2017, EchoStar successfully launched EchoStar XIX (aka Jupiter 2) to support its consumer broadband business. While we estimate that this satellite only contributed approximately $30 million in EBITDA in FY 2017, we project that when it reaches full capacity, EBITDA from Jupiter 2 could exceed $280 million annually. While some analysts appear concerned with SATS’ ability to fill up Jupiter 2’s capacity, we believe that there is a significant unaddressed TAM that is growing as the need for higher speeds also grows and areas with DSL but no cable are unable to satisfy consumer needs through terrestrial solutions. Our views are supported by the company’s recent results – in each of the last two quarters Jupiter 2 has exceeded expectations for subscriber additions.
EchoStar has also seen its Latin American operations start to contribute in a meaningful fashion. The company plans to have two broadband focused satellites over Latin America. Eutelsat 65 West A 300is already offering broadband services in Brazil and producing EBITDA. The company has also launched consumer broadband businesses in Mexico and Colombia and is exploring other Latin America countries. In Q2 2018, SATS will add additional capacity in this region with the launch of Telesat T19V. The company also has a DTH focused satellite in Latin America, EchoStar XXIII, which has been launched but has yet to find a customer. Therefore, it is currently generating no EBITDA. However, it is far from worthless. We believe the 45 degree slot occupied by EchoStar XXIII is a well-positioned slot for the video business. If the company is able to find a partner and stay in the slot, then we estimate that the satellite should generate $30-$40 million in annual EBITDA. If SATS moves the satellite to another location, such as an orbital slot over North America, it can probably generate $20-$30 million of EBITDA. EchoStar would also be able to sell the orbital slot. We would note that SATS won an auction for the orbital slot and paid $80 million with the cover bid coming from DirecTV. Finally, we note that Dish Mexico has also added over a million subs since the last write-up.
Since the last write-up, EchoStar XXI was also successfully launched on August 29, 2017. This satellite supports a state-of-the-art S-band Mobile Satellite Service. While we believe this satellite is unlikely to earn much on its own, SATS has secured the accompanying terrestrial spectrum by launching the satellite. The company is now focused on having the spectrum permissioned for terrestrial use, which is known as having a Complementary Ground Component. It is important to note that last year Inmarsat announced that it had received approvals in the U.K. and Germany for its Complementary Ground Component (CGC). These approvals illustrate the UK and German governments’ willingness to permit this spectrum to be deployed commercially. These approvals give us hope that these countries will issue similar approvals for EchoStar’s S-band spectrum. If SATS is able to re-permission the spectrum, we believe its value could be substantial. While the value of this spectrum is difficult to estimate, we can look at various values per MHz pop and compare them to the AWS-3 auction, since the spectrum is of a similar mid-band variety. A table of the potential values of the spectrum is below:
|Illustrative Example of European Spectrum Value|
|Value per Mhz Pop||Discount to AWS-3||Value per Sats Share|
Importantly, we doubt that SATS is going to start its own terrestrial service business in Europe to compete with companies like France Telecom or Deutsche Telecom. Instead, we believe that it is likely that SATS will lease spectrum to the incumbent telco operators. This strategy may be in contrast to the strategy being pursued by DISH, but we believe this is plausible given several important distinctions. Most importantly, we believe that the outlook for SATS’ core business is much healthier than DISH’s DTH business. In addition, in our opinion DISH has made a very large bet on its spectrum position whereas SATS’ spectrum is more of an upside option for the company. In light of these differences, we believe it is likely that SATS will pursue a much less capital intensive strategy than the strategy that DISH has pursued.
We believe that the competitive environment has also improved since of21’s last write-up. Viasat on its third quarter 2018 earnings call said that its Viasat-2 satellite would have less capacity than originally expected and would also focus less on residential customers than initially anticipated. On its conference call, Viasat noted it has “an antenna deployment issue that may degrade capacity compared to the ground tests. So we and the Boeing team are working to characterize the on-orbit performance to estimate the maximum capacity of the satellite. We currently estimate the maximum capacity could be around 260 gigabits when optimized for capacity given the antenna system as we understand it.” Originally, Viasat-2’s capacity was supposed to be 300 gigabits. As a result, Viasat’s strategy appears to have pivoted to focusing on fewer subs at higher ARPUs. Both of these are positives for EchoStar as it will likely result in less competition for Jupiter 2 and better industry pricing.
The last change that we would like to note is that the ESS division is expected to benefit from the termination of the AMC-15 lease. We estimate this will benefit ESS EBITDA by $19 million. There are some other puts and takes from last year such that not all of the $19 million will fall to the bottom line, though, we do expect ESS EBITDA to be up year over year.
In combination, we target a stock price approximately 40% above the current share price. We also expect fair value to grow over time as additional subscribers are added to Jupiter 2 and in South America and as additional satellites are launched. Our SOTP also does not account for the company’s stake in OneWeb, any value for the S-Band Spectrum, any future income from EchoStar XXIII, or any future growth when Jupiter 3 launches in early 2021.
|Echostar Satellite Services||331||7.5||2,482.6|
|Corporate and Other||-54||7.8||-418.5|
|Dish Mexico ($375 per sub)||788.3|
|Total Parts Value||8,055.5|
|Marketable investment securities||814.2|
Please note that our SOTP incorporates a pure estimated corporate expense number for 2018. In contrast, SATS reports a corporate expense number that includes a number of one-time items and also includes dividend payments from DISH Mexico. In order to avoid double counting these dividend payments, we isolate the corporate expense at SATS and exclude any one time deductions or additions.
continued growth in core business
complimentary ground permissions for spectrum in Europe
Execution in South America