INMARSAT
Total halfway revenues $616.2m
It has been a difficult haul for Inmarsat over the past couple of years, but this does not seem to have been reflected of late in the share price. The main hitch was the failure to launch its third GlobalXpress satellite in May on one of the unreliable Proton rockets from Baikonur in Kazakhstan.
The satellite finally went up at the end of last month and this completes the array of three that Inmarsat needs to provide global coverage of GX by the end of the year. This is a significant milestone, because GX will be providing revenues of $500 million within five years. The company is also no longer reliant on any more Proton launches,
Yesterday Inmarsat, which joined the FTSE 100 in June, announced a further initiative, linking up with Deutsche Telekom to provide broadband coverage for travellers on European airlines. This will require a new satellite using a different band than GX and will not be operational for at least 18 months; one airline, Lufthansa, has been signed up but wants it immediately and will use GX, instead.
It is not possible at present to replicate this in North America and Asia. The project is part of the attempt by Rupert Pearce, the chief executive, to build up business in the airline sector to counter the effects of lower military spending after withdrawals from Afghanistan and Iraq, the effects of which were obvious enough in the interims. Inmarsat expects total revenues for this year to come in at between $1.25 billion and $1.3 billion. It is hard, though, to draw any meaningful investment conclusion from the year before GX is up and running, and a price earnings multiple of about 33.
Meanwhile, the company has resolved, for now, its long-running problem with LightSquared in the United States, which, though in adminstration, is providing about $70 million a year for the use of some of its spectrum. How this will work itself out is anyone’s guess, although if LightSquared finds a new owner, that buyer would still need Inmarsat.
The shares, below £8 at the end of last year, rose 11p to 999½p on news of the new venture. I have suggested tucking them away before, when the price was much lower. I still like them in the long term, but there seems no pressing reason to buy, as the good news seems to be in the price.
MY ADVICE Avoid for now
WHY Start of GlobalXpress next year will transform Inmarsat’s fortunes, but at this level the shares seem to take this into account
RSA INSURANCE
Value of Zurich offer £5.6bn
As one analyst pointed out when Zurich Insurance walked away from RSA only a day before the deadline to make a formal offer, it is Zurich that has the problem, not RSA. The due diligence process turned up nothing untoward, RSA was keen to point out yesterday.
Zurich’s reasons seem surprising, given that the problems it flagged up — higher losses in China and the United States — have no connection with why it wants to buy RSA, namely the latter’s exposure to Canada and Britain. Still, all that is academic now.
There are two options now. Having accepted that it is prepared to be bought, RSA is served up on a plate for anyone prepared to pay the 550p a share that Zurich had indicated.
Alternatively, Stephen Hester, the chief executive, has made quite clear and is well down the track on this. The halfway figures indicated a positive core operating ratio, the difference between profits and losses. He has indicated that the company will have completed the necessary restructuring by the time the 2015 results are out in February; with the Latin American operations sold and contributing another $400 million to shore up the balance sheet, there are only two minor disposals to go.
Thereafter, it is down to running the insurer more efficiently and maximising returns. If analysts are to be believed, this year’s underwriting profits should be at record levels. At 403¼p, off 106¼p, the shares are back below 1.5 times’ net asset value. I am sceptical whether another bid will emerge, but I would be buying long-term, anyway.
MY ADVICE Buy
WHY RSA will either receive another bid or recover
DEBENHAMS
10x earnings multiple this year
It remains to be seen whether or not there is a hard core of disaffected investors in Debenhams that want to throw out the board, including Michael Sharp, the chief executive. If there is, it is not clear what their beef is.
The same would not have been true a year ago, when Debenhams was struggling. Some still wonder if its mature position on the high street and the intense competition from other fashion chains mean that much can be achieved in the short term. The recovery strategy put in place by Mr Sharp looks to be progressing well enough.
Debenhams will release results to August 31 in a month’s time. It is moving sales to the internet and investing in its online operation. It is using unwanted space by bringing in other retail concessions. The attempt to reduce the amount of discounting needed to shift excess stock will always be reliant on trading conditions, but a glance out of the window suggests this autumn will not see a repeat of the difficult conditions a year ago.
The shares, off ½p at 75p, are little changed from where they were at the start of the year, which is not bad, given what’s happened to the market. On about ten times’ earnings, they still look good value.
MY ADVICE Buy
WHY Shares sell on a more reasonable multiple now
And finally . . .
It comes as a surprise to find that there are still affordable assets to buy and develop in London’s overheated housing market. Telford Homes, a relatively small housebuilder focused on the capital, is buying the regeneration business of a competitor. This has four assets in areas such as Poplar, in the East End, and Finsbury Park, north London, that will add £500 million to Telford’s supply of developable assets worth £1 billion. As Shore Capital, the house broker, points out, such a land bank does not come on the market that often.
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