Annual results released this morning by Inmarsat (LSE: ISAT) capped off a dreadful year for the satellite firm in which profits shrank by a quarter, it slashed its dividend based on cash flow fears and saw its share price swoon by over 40%.
But with a hearty 5.5% dividend yield still on offer, an underlying business that is still profitable, and solid growth opportunities, should contrarian investors take a chance on Inmarsat?
I would urge caution. On one hand, the group still makes a fairly compelling investment case as its revenue is growing, up 5.4% last year to $1,400m. And its largest segment, maritime solutions, may finally be turning a corner with Q4 sales returning to year-on-year growth. Furthermore, over the medium term its pan-European satellite broadband solutions for aircraft is a potential goldmine if air passengers fork over gobs of cash to stay connected during their flights.
However, there are also plenty of red flags. For one, margins are compressing as management ups investment in the aviation division in anticipation of future growth. Of course, this could work out wonderfully, but competitors have launched a lawsuit against the tender that awarded Inmarsat this contract, it’s far from clear whether future demand will ever meet lofty expectations, and the cash-intensive nature of this division means it needed to cut cash outflows elsewhere to pay for it, which led to the dividend cut.
Then there is the group’s high and rising net debt, which increased to $2,078m at year-end as net cash flows turned negative to the tune of $166m. This net debt is still only 2.8 times EBITDA, but with profits moving backwards and cash outflows increasing, Inmarsat had better hope its big bet on European in-flight WiFi pays off. This may yet turn out to be the case, but with plenty of red flags and a non-bargain valuation of 14 times forward earnings, I’m giving Inmarsat a wide berth for now.
Can management turns these rags into riches?
A more interesting high-yield option for contrarians may be newspaper publisher Trinity Mirror (LSE: TNI). The group currently offers investors a massive 7% dividend yield that is covered nearly four times by earnings.
Of course, there is the minor problem of print newspaper readership stuck in terminal decline. And Trinity Mirror hasn’t been, and probably never will, be able to solve that one.
That said, management has found a way to keep its papers highly profitable even as revenue careens downwards. And the key is snapping up other newspapers and ruthlessly cutting costs, which boosted operating margins to a respectable 20% last year.
Its most recent deal was the £127m purchase of the owner of the Daily Express. Management expects it can slash operating costs at the newly acquired papers by some £20m a year, which in addition to the £35m in EBITDA they already generate, could make the deal another great one.
These sorts of deals won’t stop revenue falling as advertisers continue to move online, but if management can figure out how to monetise its market-leading 33.4m unique monthly online visitors, it could actually return to growth as newspaper revenue shrinks. There’s still a long way to go, but for investors who believe Trinity Mirror’s high-grade management team can pull off another coup, its shares could be a bargain at under 3 times forward earnings.
