One might expect a business that shoots things into space to trade at a racy multiple. Inmarsat, the UK-listed satellite business, conforms to type: its shares cost about 27 times this year’s forecast earnings. Yet it will generate returns on capital employed of just 7-8 per cent. A 5 per cent drop in the shares on Thursday, after Inmarsat downgraded revenue forecasts for this year, looks like an overdue correction.
But a rich valuation for a company that makes seemingly meagre returns reflects the characteristics of the satellite industry and Inmarsat’s position in it. Once in orbit, a satellite will typically take five years to recoup its heavy deployment costs. After a busy launch schedule, Inmarsat has lots of kit floating around the earth; the “property, plant and equipment” line of its balance sheet has ballooned from $1.8bn to $2.9bn in four years. Over the coming years newer units will generate profits and returns should improve dramatically.
The group has two big ideas for using its capacity. One is Global Xpress, a worldwide high-speed broadband service. The other is the European Airline Network, a partnership with Deutsche Telekom that will allow WiFi to invade one of the last bastions of peace and quiet — the cabins of airliners. Both are still in rollout mode and acceptance is taking time.
Meanwhile existing markets are challenging. Half of Inmarsat’s revenues come from maritime communications, which are suffering from a slowdown in seaborne trade and a trend towards fewer and bigger ships. The withdrawal of troops from Iraq and Afghanistan has reduced demand from the military. Customers in the oil, gas and mining industries are also spending less. And as television services migrate to fibre, broadcast-focused satellite operators have leased their spare capacity, lowering prices.
Inmarsat shares hit an all-time high late last year, but have lagged behind the FTSE 100 in 2016. Given the risks, the lower orbit looks justified.
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