Inmarsat is in a fast-growth sector but it's expensive too.
One of the ways in which British investors can diversify away from our moribund economy is to invest in those companies which do most of their business outside the British Isles. One such firm is Inmarsat (LSE: ISAT), the provider of mobile satellite telecommunication services whose networks and customers are all over the planet. Should you ever have the need to make a 'phone call from the Himalayas, Pitcairn Island or the Kalahari Desert, all you need is one of Inmarsat's satellite telephones!
Inmarsat's profits and earnings per share have increased during the recession and its shares are up by almost 40% in 2009. Profits have grown strongly since it was floated on the Stock Exchange in 2005 and as the demand for its services looks set to continue to increase, profits should grow for years to come. However, because investors are always prepared to pay a premium for a strongly growing company this means that Inmarsat's shares are not cheap.
An Interesting History
Inmarsat was founded by the United Nations in 1979 as the International Maritime Satellite Organization, a non-profit organisation for the improvement of maritime safety to create and operate a global satellite telecommunications network. Inmarsat became a private company in 1999 and it remains subject to regulatory control to ensure that it continues to provide free access for all seafarers to the Global Maritime Distress Safety System.
Inmarsat owns and operates a network of eleven geostationary satellites which provides telecommunications coverage over most of the world. The majority of Inmarsat's turnover comes from providing satellite telecommunications for shipping, which is a fairly stable business since you can't connect to mobile phone networks such as those operated by Vodafone (LSE: VOD) and Orange when you're in the middle of the Pacific Ocean!
Whilst we might have expected the maritime division to suffer as international commercial shipping has declined during the global recession, Inmarsat recently reported that the recession has had very little effect upon its maritime services business.
Some 37% of Inmarsat's business comes from governments and the United Nations, primarily from providing services to their militaries and the UN's peacekeeping and relief missions.
Show Me The Money
Inmarsat's accounts are produced in US dollars and whilst it pays dividends in sterling, British investors are exposed to changes in the pound-dollar exchange rate.
The shares are on a historic P/E ratio of just over 14 although this figure is distorted thanks to a one-off tax rebate for 2008. If we use the company's adjusted earnings per share of 32 cents, which ignores this rebate, Inmarsat's shares are on a P/E ratio of 34. The historic dividend yield on the shares is about 2.9%.
The table below summarises Inmarsat's earnings and dividend record since flotation. The large increase in turnover and earnings per share in 2008 goes some way to explain why Inmarsat's shares are on a high P/E ratio; any business that can significantly increase turnover and profits during a recession at this rate will attract investors.
| Year ended 31 Dec | 2008 | 2007 | 2006 | 2005 |
|---|
| Adjusted diluted eps | 32c | 21c | 17c | n/a |
| Diluted eps | 77c | 21c | 28c | 17c |
| Dividend | 30.33c | 28.88c | 26.66c | 16.42c |
| Turnover ($m) | 996.7 | 576.5 | 500.1 | 491.1 |
| Pre-tax profit ($m) | 193.8 | 124.7 | 89.8 | 95.5 |
For the first half of 2009 Inmarsat's turnover rose by 4.9% whilst earnings per share were up by 21% and the dividend was increased by 5%. That's a pretty impressive performance in the teeth of the worst global recession since the 1930s.
Inmarsat operates a small final salary pension scheme which, unlike most other private sector schemes, has a surplus! As of 31 December 2008 the liabilities were $31.5 million, compared to assets of $35.0 million. This is nothing to be concerned about due to the relatively small size of the scheme.
The Competition
During the dotcom and information technology bubble there was a massive amount of investment in two private sector satellite telecommunications companies, Iridium and Globalstar LP, both of which fell into bankruptcy. The restructured Globalstar and Iridium Satellite Services are now Inmarsat's major competitors and Iridium has a small advantage in that its networks cover the entire world (Inmarsat doesn't cover the North or South Poles).
Other competition for the lucrative North American market comes from Msat and Terrastar, while Thuraya is a major competitor in Europe, Africa, Asia and Australasia. Iridium is Inmarsat's main competitor for the deep ocean shipping business.
Mobile telephone networks provide limited competition because of their total lack of coverage in remote regions and at sea, but Inmarsat will ultimately be exposed to some competition from internet telephone call services such as Skype which enables Inmarsat's satellite broadband customers to use the "voice over internet protocol." Inmarsat has reacted to this by buying the American VOIP company, Segovia.
To summarise, the global telecommunications market looks set to continue to grow for the foreseeable future as ever increasing amounts of information are moved around the globe. Inmarsat offers investors exposure to this rapidly growing sector, albeit at a relatively high price.
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