|Shares Out. (in M):||451||P/E||28.9||24.0|
|Market Cap (in $M):||6,980||P/FCF||40.7||28.6|
|Net Debt (in $M):||1,922||EBIT||360||417|
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ISAT is the largest operator of global mobile satellite communications. ISAT stock represents a compelling investment with attractive risk reward as significant investments have clouded the valuation picture but will soon be major contributors to growth, EBITDA and FCF. Additionally, ISAT should be able to step up its capital deployment, will announce a series of sizeable contract wins for its new network and has incremental upside from Lightsquared and S-band. ISAT benefits from high barriers to entry, a steady core business, spectrum scarcity value, growing demand for in-flight connectivity, an unmatched global high speed network, long term govt relationships, mission critical services and a more cash generative capex cycle. Using a 10x EBITDA multiple on out year projections yields 50% plus upside.
ISAT is comprised of it’s a) core business b) Lightsquared spectrum c) S-band integrated telecommunications network and d) Global Xpress global Ka-band satellite constellation...
ISAT’s core business is comprised of its maritime, government, enterprise and aviation segments. S-band and Global Xpress financial results will eventually materialize within the core business segments (though I detail that dynamic separately). ISAT has a global L-band network enabling it to provide mission critical remote connectivity.
ISAT’s L-band (sub 0.5 Mbps), Xpress link (768 Kbps, fully integrated Ku-band and L-band product – pathway to Global Xpress when ready) and Ka-band (50 Mbps) are its three bands.
o ISAT was set up in 1979 by the International Maritime Organization to enable ships to stay in constant communication with shore or to call for help in an emergency. Today, ISAT offers a broad portfolio of mobile voice and data solutions to deep sea merchant vessels, coastal merchant, work boats, fishing boats and smaller vessels. This is a steady business for ISAT where its uniquely positioned. Certain equipment is required by law on every passenger carrying vessel/every ship over 300 tons. ISAT has significant market share. Operators need ISAT’s GMDSS (global maritime distressed signal) to get an operating license. ISAT is the only satellite provider that meets the International Maritime Organization’s standards to offer GMDSS. This competitively advantageous platform enables ISAT to cross-sell other services. The main drivers here are fleet growth, ship management, automation cost savings, crew welfare/access and smaller vessel adoption.
o Inmarsat offers voice, data and video services to governments all over the world and has served the sector for 35 years with a footprint of over 80 countries. The Government sector is segmented between global government and the US government.
§ Global Government: “From Defence forces operating in inhospitable terrain, to first responders bringing relief during a disaster, border control at sea and by air, and in the efficient delivery of critical national infrastructure – we connect those who Protect”
§ US Government: “Inmarsat provides a trusted network of global, mobile mission-critical satcom services that are highly reliable, secure and affordable to US defense, intelligence, homeland security and civilian organizations”
o Inmarsat provides a broad portfolio of global voice, broadband data, M2M (machine to machine) and other value added services to various other enterprises “From oil and gas engineers carrying out remote diagnostics on an oil wellhead, to journalists reporting live with breaking news, our services offer a compelling proposition for businesses requiring 'must-have' remote and mobile connectivity.”
o Inmarsat provides connectivity for the whole aircraft from safety communications to high-speed broadband and live TV in the cabin. On aircraft with ISAT’s equipment, passengers can make mobile phone calls, access email or the internet on a smartphone, tablet or laptop, pilots can maintain contact with air traffic control, convey maintenance status to ground crews. ISAT was the first operator to comply with the requirements of the International Civil Aviation Organization for global safety communications and its services are used by most of the world’s leading airlines (satellite aided air traffic control, automatic reporting of an aircraft’s real time position, direct cockpit communications).
Key Satellite Competitive Offerings/Industry:
o Iridium offers L-band via OpenPort while Thuraya offers L-band service with speeds up to 444kbps (no L-band coverage over the Americas). Iridium is launching satellites in 2015-2017 but the NEXT satellites will utilize L-band spectrum with satellite interlink over Ka-band thus limiting the speed that can be offered over the constellation. Iridium is pushing to gain a GMDSS license. ISAT is considered the most reliable and there are some switching costs. Based on user conversations, I believe Iridium (if it successfully gains a license) will make little inroad into ISAT’s maritime business.
o There is some Ka-band competition from the ViaSat/Eutelsat network but it has geographical limitations. Ku-band competition is from SES and Intelsat (EPIC satellites are expected to launch over the next 5 years starting with two next year). SES provides C-band and Ku-band up to 4 Mbps (targets short sea commercial vessels).
o A decent summary from CSFB on FSS operators …“The FSS operators have typically offered broadband capacity using either high-frequency Ku-Band or Ka-Band capacity. A few FSS operators have added Ka-band capacity recently (e.g. Eutelsat). However, we do not expect the FSS operators to use new Ka-band capacity to move more aggressively into Maritime broadband with no FSS operator having good coverage of the Pacific or Atlantic oceans… The Maritime VSAT (very small aperture terminals) market remains a relatively small market for FSS operators for the following reasons: a) No FSS operator is able to offer VSAT on a global basis; b) FSS coverage concentrated over land masses rather than the oceans; c) VSAT suffers a deterioration in performance in bad weather due to the relatively high frequencies at which it operates; and d) VSAT is typically more expensive.” I do think there will be some small inroads here from the FSS crowd.
ISAT has spectrum that is interlaced with spectrum owned by Lightsquared where ISAT receives rental payments. The interlaced nature of the two different spectrums is critical to the overall usability of Lightsquared’s spectrum. Lightsquared had a spectrum rental agreement in place with ISAT prior to its bankruptcy (~100% margin for ISAT). The agreement was not put in bankruptcy but was put in moratorium until March 31, 2014 when payments essentially re-started. Lightsquared had unresolved FCC Interference issues with its interlaced spectrum and GPS which led to its chapter 11 filing. There has been a lot of drama in the bankruptcy case but the judge approved Lightsquared’s exit financing in June of 2015 with emergence expected by year end. Emergence hinges on the FCC giving the nod to transfer Lightsquared’s spectrum license to its new owners (JP Morgan, Fortress and Centerbridge) but as a recent Bloomberg article noted “it lacks the one thing that will be the biggest factor in whether it can survive outside the court’s protection – FCC approval to operate its satellite-based wireless network”.
o “LightSquared submitted to the FCC its testing plans designed to determine where interference may occur between LightSquared's L-band spectrum and GPS receivers and how it can be resolved. A GPS industry group has indicated it does not consider the tests legitimate and is going to work with the U.S. Department of Transportation on separate tests” FierceWireless
S-band Integrated Telecommunication Network
In June of 2014, ISAT announced that it would deploy an integrated telecommunications network to deliver high speed connectivity to European airline passengers and for public protection and disaster relief services (you can read more here…http://www.inmarsat.com/wp-content/uploads/2014/06/Inmarsat-S-band-services-June-2014.pdf).
Global Xpress Global Ka-band Satellite Constellation
ISAT was able to successfully launch its second GX satellite in February of 2015. On August 28th, ISAT successfully launched its third and final satellite required to complete its new Global Xpress network (you can watch the launch here…http://www.inmarsat.com/service/global-xpress/). In the next few months post final testing, this service will be the Earth’s first worldwide high speed broadband satellite network with an unmatched combination of speed and coverage. There is meaningful demand for Global Xpress’ offering from both commercial and government customers.
L-band Scarcity Value:
o Iridium and Inmarsat are the two players in the market with Inmarsat being the biggest and most reliable. Mission critical needs are steady - L-band is the most reliable band in bad weather and is used for global distressed signaling. Vessel owners need ISAT’s GMDSS (global maritime distressed signal) to get an operating license which is a great platform for other offerings. Iridium is applying for a GMDSS license. Based on user conversations, I believe Iridium (if it successfully gains a license) will make little inroad into ISAT’s maritime business.
Global Xpress Game Changer:
o Inmarsat has spent $1.6B over the past few years and has little revenue, EBITDA and FCF to show for it. Global coverage will be complete by the end of 2015 and the next few years will see a significant uptick in ISAT’s financial performance.
§ The timing here was pushed out a couple of times due to two separate Proton launch failures. In turn, there were near term estimate reductions to revenue and EBITDA (after the first proton launch failure, mgmt reiterated its 2014-2016 growth targets but noted they were more back end loaded – post the more recent proton launch failure, mgmt suspended its guidance but reiterated the eventual $500MM of incremental revenues by the fifth anniversary of the global launch). EBITDA margins should be in the 70-80% range. ISAT has previously indicated that ~30% of this revenue target was already committed. Talking with the company and industry participants, I think the target is reasonable and could materialize ahead of schedule.
o Spare satellite potential
§ In early July 2014, Inmarsat announced that it has three slots on SpaceX (one S-band and its fourth GX satellite/its spare). Unfortunately, SpaceX has also had some launch failures (though ISAT has a 16 for 16 satellite launch track record). The fourth/spare GX satellite is expected to be launched on SpaceX in the second half of 2016. Given conversations with mgmt and industry participants, there is a strong likelihood that this satellite will be additive and not the advertised spare potentially meaning another $125MM in EBITDA.
o ISAT now has global coverage well before its competitors though most competitive satellites are more consumer broadband focused anyway
o Significant US Govt support
§ $700MM of financing was from Ex-Im Bank (the US Govt)
§ The US Govt will only use Ka-Band technology going forward for new platforms – they will either use their own military satellites or ISAT’s satellites. All the existing terminals/drones are using Ku/C-band – the US won’t switch those over but any new platforms/drones/terminals are being built in Ka-band. The other satellites going up in Ka-band don’t have the military Ka-band specs/security features that ISAT’s satellites have.
· Interesting article noting that the Pentagon plans to sharply expand drone flights over the next four years. http://www.wsj.com/article_email/pentagon-to-add-drone-flights-1439768451-lMyQjAxMTI1MDE1NzkxMjczWj
§ ISAT IR conversation from early 2014 …“The US Govt came to us – our CEO is on a pentagon standing committee – they basically said these are our needs and start building– we decided to build it not just for that – the Govt is cutting back on hardware – Obama cancelled the tsat satellite program set for 2019. Beyond the Wideband Global Satcom System (“WGS”), there are no satellites being developed or built by the US military – that was a key catalyst to build the Global Xpress network – military needs more (for more communication/more drones) but have no network – the military cutbacks investor concern aimed at us is actually a huge opportunity for Global Xpress – the long term opportunity for us is substantial”
o Significant capacity pre-commitments
§ ~30% of cumulative 5 year plan revenues are already secured
o Mgmt now expects Lightsquared payments of $17.5MM per quarter through the end of 2016 and after that the range is $50MM-$140MM/year depending on how much spectrum Lightsquared opts to take.
§ Pre-Lightsquared’s Chapter 11 filing, Lightsquared was paying $145MM in annual rental payments to ISAT. Spectrum values have increased over that timeframe.
o In June of 2014, ISAT announced that it would deploy an integrated telecommunications network to deliver high speed connectivity to European airline passengers and for public protection and disaster relief services.
o ISAT’s S-band network is a copy of GOGO’s strategy in the U.S. GOGO trades at some pretty heady multiples – GOGO ($1.5B TEV/$1.3B market cap) trades at 22x 2016 EBITDA/14x 2017. In-flight connectivity is a high growth arena (improves passenger experience/people are addicted to their phones).
o The company has revealed little detail thus far and is working through the regulatory and partnership process. Possible that there are some delays getting licenses but grants will happen (13 out of 28 so far). There are some decent estimates of the potential out there – $200-$300MM in revenue / 20-50% EBITDA margins over the next five years.
High Barriers to Entry
o The company claims it will be at least 5-6 years for a new competitor to enter the market
§ Capital, Spectrum Rights (uniform global spectrum rights now extremely difficult to secure and retain), Orbital Slots can take years to secure and may not be available), Licensing (ISAT has established market access over 35 years of operations), Distribution (relationships with over 600 organizations globally) and Reputation are all gating factors. Given recent proton and SpaceX failures, there is elevated launch risk vs. history.
o None of ISAT’s L-band satellites need to be replaced before 2020
Stepped up Capital Deployment
o Steady dividend (long history of growth) ~ 3.4% plus yields
o FCF will materially improve post 2016 as capex significantly declines (note this includes S-band capex plans which mgmt is working to limit)
o Historically, mgmt has indicated to me that they are comfortable with just under a 3.5x Net Debt/EBITDA level
o Looking out a couple years, its easy to see 1-2 turns available for capital deployment (25%+ of the current market cap potentially)
Global Xpress disappointment
o Still awaiting final testing for the third and critical satellite
o Ka-band technology doesn’t deliver what its supposed to or the demand just isn’t there or there is another technology that emerges
o There is more cannibalization to the base business than appreciated
There is more competition than expected
Lightsquared emergence/financing/strategic plan falters
Poor execution/high costs to develop ISAT’s S-band network
o ISAT is making a $425MM S-band commitment (15 year life) – Inmarsat’s share of the manufacture, launch, insurance and operations is $200MM (though mgmt is working on potentially limiting this). The first satellite will be operational in January of 2017 (launching on SpaceX in late 2016). In addition to slightly higher than expected capex, there could be some greater than expected EBITDA leakage on some upfront costs.
Contracts for GX announced
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