Broker tips: Inmarsat, defensive and cyclical shares

Satellite communications services provider Inmarsat got a boost on Tuesday as RBC Capital Markets upgraded the stock to 'outperform' from 'sector perform' and hiked the price target to 1,000p from 760p.

It said the launch of the company's fourth GX satellite on 27 April offers a large catalyst, while EuropaSat's launch should drive European Aviation Network revenues.

The Canadian bank said the Global Express satellite due to be launched next month will use a Falcon 9 rocket from Space X.

"We believe there is a strong likelihood of this satellite being used, possibly exclusively, by China," it said, adding that any such wholesale deal would be very positive for Inmarsat and would be well received by the market.

"Quantifying revenue is guesswork, but since we know the three existing satellites are projected to generate circa $500m of incremental revenue five years after launch, this suggests to us that a decent fill rate is likely to make circa $167m/satellite. With a wholesale deal likely to be struck at a discount to this run rate, we would ‘guesstimate’ around $100m per year as a reasonable figure."

RBC also highlighted the possibility of M&A, suggesting that Inmarsat might be too small to remain independent. It said the profit warning earlier this year due to aviation highlighted the fact that it is still a small company.

"Longer term, its ambitions could be better achieved as part of a larger, complementary business," it said, having argued in August last year that a combination with Echostar/Dish would make perfect strategic sense.

Defensive and cyclical shares

Strategists at Credit Suisse said they preferred defensive shares over cyclicals, albeit with one exception, financials, which led them to reiterate their 'benchmark' stance towards the former.

The main reason for their caution is that cyclicals are pricing-in a level for the new orders sub-index in European purchasing managers' indices of 59.0, which is consistent with a rate of economic growth of nearly 4%.

A similar gauge for the US, from ISM, was peaking, as was the number of macro surprises, Credit Suisse added.

Their preferred sectors are still telecommunications and pharmaceuticals and among Cyclicals, financials and technology, with their favourite geographical regions for the latter being Continental Europe and Global Emerging Markets.

"Non-financial cyclical valuations are expensive in the US and neutral in Europe," the broker said.

Furthermore, levels of sector risk appetite were "euphoric" and hedge-funds' weighting in Cyclicals have risen to normal levels in the States.

Several so-called Trump/reflation trades, such as the US dollar or Emerging Markets, had also unwound back to their pre-election levels, yet cyclicals remained "somewhat elevated", they said.

However, Garthwaite still likes some cyclicals because of their exposure to growth on the Continent or on valuation grounds and because of the stage in the corporate earnings cycle at which they are at, such as WPP and Johnson Matthey.

Among defensives, telecoms was their stated preference, including Deutsche Telekom, Vodafone and Com Hem, all of which were at 'Outperform'.