With the launch of high-speed satellite broadband on commercial flights, Inmarsat ought to be flying high.
Airlines are tripping over themselves to kit out jets with wi-fi. From BA owner IAG to Lufthansa, they are all racing to install the networks that will allow passengers to watch films, shop online and post Facebook status updates at 35,000ft.
With contracts and commitments to hook up 1,300 planes, and a pipeline of about 3,000, Inmarsat should be on a roll, thanks to its network of 13 satellites. Yet its share price has almost halved since the late 2015 peak. Last year the satellite company was ousted from the FTSE 100, and it ended last week at 594.50p, valuing the company at £2.76bn. At that level it could elicit interest from long-rumoured American predators EchoStar and Dish Network.
A constellation of problems, from competition to the woes of its rivals, has depressed shares in the company, which was formed in 1979 as the International Maritime Satellite Organisation. Inmarsat’s original mission was as a non-governmental organisation to provide satellite communication for the shipping industry. Maritime still makes up more than 40% of revenues, but it remains in the doldrums amid an ongoing global glut of cargo ships and depressed prices. The downturn is nothing new, but aviation was meant to pick up the slack.
What analysts at investment bank Numis fear, however, is that fierce competition in aviation infects margins in its bread and butter industries. Shipping lines and governments will question why they are letting Inmarsat make 70%-80% profit margins while airlines will tolerate only 40%-50%.
Squeezed margins could in turn affect its dividend, which with a 7% yield is one of the stock’s main attractions. For years Inmarsat’s stonking growth prospects have allowed it to carry a $2bn (£1.53bn) debt burden while paying generous dividends — $228.5m last year.
That hasn’t been a problem while free cash flow was high, but Inmarsat’s hefty cash burn, as it ramps up its aviation business, suddenly leaves its dividend looking exposed. Numis analysts reckon divis will not be covered by free cash flow until 2023 — meaning it is partially using debt to fund payouts.
Calling time on dividend growth might not be a such a bad idea, allowing its finances room to breathe, but that will require patience from investors, who have endured a bumpy ride. Avoid.
