Friday newspaper share tips: Inmarsat, Centrica

Inmarsat’s trading will get a boost in coming years following large investments in getting new kit into space but the challenges facing the industry mean that a correction in the shares was overdue, the Financial Times’s Lex column said.

The company’s shares were trading at 27 times’ forecast earnings for 2016 yet the company was only expected to generate returns on capital employed of between 7% to 8%; hence the correction in the stock price on Thursday, after the company slashed its revenue guidance.

Nonetheless, the satellite industry requires large investments just to deploy the craft into space – with five years typically needed just to recoup the cost of getting them into orbit.

Indeed, a busy launch schedule over the last four years means that in time the firm should see a dramatic improvement in profits and returns.

Among Inmarsat’s projects are plans to roll out a worldwide high-speed broadband internet service, known as Global Xpress, and The European Airline Network, which aims to bring Wifi into airliner cabins.

Offsetting those opportunities, maritime communications have taken a knock due to the slowdown in seaborne trade and the increased use of fewer - and larger – ships.

Demand from the military has also fallen after pull-outs from Afghanistan and Iraq and the migration of TV services to fibre has lowered prices to satellite operators in the space.

A lower orbit seems justified given the risks, Lex concluded.

Centrica’s surprise decision to place more shares on the market is well thought-out and has pushed the shares’ forward dividend yield close to 6%, which makes them worth buying, The Times’s Tempus said.

Ultimately, the energy provider decided it was better to issue new equity to finance the purchase of two businesses necessary to build-out its “customer-facing business”, a key part of its strategy to shift away from exploration and production.

The alternative would be to sell E&P assets at potentially fire-sale prices. Next year on the other hand, the price of oil might recover, allowing it to fetch a higher price.

“Buy for the long-term, the yield is becoming highly attractive,” Tempus said.

With debt ratings agency Moody’s set to deliver its verdict on the company’s debt profile this month – after placing its rating under review in February - Centrica decided it was best to take no chances, Lex chipped.

A ratings downgrade might negatively impact its North American power trading unit, which depends on low-cost financing, management decided.

It was a sensible decision despite the market’s harsh reaction and “the 5% yield on offer is enough to make punters green with envy”, the tipster concluded.