Inmarsat a 'sell' for Numis over revenue and margin doubts

There are many reasons to be cautious about Inmarsat's revenue and margin prospects, broker Numis warned as it slapped a 'sell' recommendation on the satellite company's shares.

Numis, which initiated coverage with a target price of 480p, did not contest management's view that demand for satellite connectivity will keep rising apace for years to come, but caution about the company's outlook was heightened given its current share price.

For maritime business revenue growth could be much less than the consensus 2.5% in the current and 4.4% in the subsequent year.

As for government sales Numis think "business with Boeing may not be growing fast enough to make up for ebbing take-or-pay revenue", while in enterprise Inmarsat has lost its strategic take-or-pay partner.

In the aviation arm, 9%, price and service competition remain very intense and analysts think the group "may now be less bullish about prospects of its flagship Lufthansa contract".

As for margins, management expects aviation margin to fall to 40-50% over the next five years from 68% last year, yet the consensus forecast points to 51%, 48% and 53%, for 2017-19.

Government margins may not have been as strong as management commentary implied, while in maritime the cost of incentivising strategic partners to win more ships "will eat into the efficiency of bringing existing vessels on-net".

Capital expenditure is likely to surge 10-20% more than most analysts expects, Numis reckons, as intense competition in in-flight connectivity also shapes customer expectations in maritime and government and requires the company to keep spending on its global network.

By the 2019 financial year, Numis forecasts for EBITDA are 8% lower than consensus, with a flat dividend.

The target price, which implies downside of more than a third, is derived from a discounted cash flow basis, "because comparing valuation multiples means little, since 'peers' are at different stages of executing different business plans".