Berenberg upgrades Inmarsat on value and LightSquared option

The German bank said it continues to believe the market underestimates the threat of competition and the negative impact on Inmarsat's free cash flow and warned there "could be more disappointment to come".

The FTSE 100 company's recent final results displayed evidence that trading is far from easy at its three largest divisions.

In maritime the commercial shipping market was said to remain "troubled", government operational budgets and activity levels "continue to exert downwards pressure" and within enterprise, the energy industry "remains depressed".

While Inmarsat has generated excitement about in-flight connectivity, it is a "hugely competitive" market and its Global Xpress (GX) and S-band offering is felt by analysts not to be the most attractive technological solution.

The ease with which Inmarsat signs further in-flight contracts and the subsequent impact on financials and returns is where Berenberg has "considerable concerns" as the company needs to incentivise airlines by taking the operational and financial up-front capex risks.

However, as a vacuum of contract announcements is the only potential near-term negative catalyst, share price underperformance "appears less likely", analysts said.

This is amplified in light of the upcoming decision on LightSquared (L2) which has an option until the end of March to to increase its L-band capacity commitment, which which could see payments increase from $50m a year to anything up to $145m and so could prove a positive catalyst.

Given L2’s recent deals to persuade GPS operators to drop their objections to its high-speed data service, Berenberg said it now assumed a 66% likelihood of perpetual payments, up from 50%.

While the shares' valuation is not cheap it is less demanding at 28 times a blended 2017 P/E ratio, including 50% of the earnings from the L2 opportunity and 10.5 times blended EV/EBITDA.