Intelsat Results – The Aftermath
[Via Satellite 11-04-13] When Intelsat eventually had its IPO in April this year, it became the latest major satellite company to have its stock scrutinized by a number of investment bank analysts who would give stock recommendations on the company. Here, we look at what the investment bank community is saying in light of the operator’s most recent results, which were announced late last week. The company reported revenue of $651.8 million and net profits of $87.8 million, for the three months ended Sep. 30, 2013.
Bryan Kraft, a satellite equity analyst at Evercore, said the results were better than expected, although a number of challenges remain for the operator. “The results were modestly better than our estimates. Revenue was $2 million above our forecast, with government and other higher, partially offset by lower network services and media. We believe the growth outlook will remain challenging for the next two years assuming U.S. government sequestration continues to pressure department budgets and given Intelsat’s very limited capacity growth during this timeframe,” he said in a research note.
Kraft believes that, despite some challenges in certain markets, the operator could see some strong growth over the next few years. “We believe capacity expansion (i.e. new Epic satellite launches) will accelerate revenue growth in 2016 and 2017 to 3.2 percent and 4.3 percent, respectively, with potential upside to this from a post sequestration rebound in U.S. government spending and the rollout of 4K as a new HDTV standard. Our long-term thesis is essentially unchanged (that Intelsat will see multiple expansion over the next two years as its forward revenue growth rate accelerates in 2016). One turn of multiple expansion equals ~$10 in share price appreciation,” he said.
In his initiation on the stock in May, Kraft painted an optimistic future for Intelsat. “Intelsat could ultimately trade at a premium to SES and Eutelsat, in our view, because its more levered capital structure has the ability to generate higher equity returns,” he said in a research note written back in May. “Global growth in data consumption and TV should drive low- to mid-single digit FSS revenue growth over the next five years, notwithstanding Intelsat’s capacity shortage through 2014. There is potential upside to our one-to-three year revenue forecast from increased utilization of existing transponder capacity, and longer-term potential upside from a shift to 4K as a new TV standard. Intelsat has a transponder utilization rate of 78 percent. The practical limit for utilization is 85-86 percent, which implies potentially 132 additional transponders could be leased to clients by year-end 2015.”
Andrew Spinola, Vice President at Wells Fargo Securities also said it was a tough environment for the operator right now. “Intelsat reported a soft Q3 with, not surprisingly, government driving the majority of the shortfall. The bigger surprise is the updated 2013 guidance, which implies Q4 revenue of ~$640 million vs. our prior $666 million estimate. Intelsat attributed the weakness to both government and to a lesser extent some competitive pressures in the network services business in Africa,” he said in a research note. “Both of these pressures should continue going forward but it’s difficult to ascertain how revenue will trend as other business potentially offsets these declines. Our sense from the conference call is that there are no clear offsets to these declines in the near-term so we are cautious about the near-term outlook.”
Simon Flannery, a satellite equity analyst at Morgan Stanley, said in a research note, that Morgan Stanley believes revenue headwinds “are not a complete surprise” and that “they may cloud the near-term outlook”.
Chris Quilty, SVP, Raymond James, also highlighted the government market and Africa, as potential factors holding Intelsat back. He said uncertainty around government spending was his main concern about the company. “Government revenue fell 10 percent to $122 million, primarily reflecting a decline in (lower margin) off-network services. Sequestration and ongoing budget uncertainty has delayed RFP activity and contract awards, while also leading to shorter contract periods. Government spending uncertainty remains our top Intelsat concern, and we do not expect a resolution until after the 2014 election cycle,” he said in a research note. “Intelsat experienced revenue weaknesses and $6 million of bad debt expense in Africa due to: (1) ongoing fiber encroachment and, (2) increased pricing pressure from new satellite operators. We expect African headwinds to persist for the next 12-18 months as contract renewals are marked down and Intelsat sheds questionable customers in favor of large, sophisticated media and telecom operators.”
Batya Levi, a satellite equity analyst at UBS, said in a research note that deleveraging would remain the key focus for the company. “At the end of the third quarter, Intelsat had $15.0 billion in net debt, with an average cost of 6.5 percent, down from 8.0 percent at year-end 2012, and net leverage of 7.3x vs. 7.5x in 2Q13 and 7.8x at year-end 2012. Delevering the business remains management’s top priority. We expect the company to refinance its Jackson notes opportunistically that carry an average cost of debt of 7.3 percent,” she said. “We believe Intelsat has the right assets and launch pipeline to improve topline growth in the next few years, reduce leverage, and drive equity appreciation.”