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29 Dec 17. The Bearbull Income Fund’s latest holding – satellite communications provider Inmarsat (ISAT) – had tanked and an investment from late 2015 – student accommodation provider Empiric Student Property (ESP) – wasn’t far behind. Losses sustained on these two in the second half of 2017 – Inmarsat shares were only bought in August – are £11,000, which has removed over 3 per cent from the fund’s value. That isn’t catastrophic, but it means gains in the second half will be only nominal.
Intriguing speculation surrounds both companies, especially Inmarsat where the contrast between what its bosses say and what the market portends via the share price could hardly be more stark.
Inmarsat is dashing for growth as it attempts to capture enough of the newish market to supply broadband via satellite, particularly to in-flight passenger aircraft. To the winners, providing in-flight connectivity should mean a plentiful stream of cash profits. But Inmarsat’s window of opportunity is limited, the market is competitive, agreeing contracts with airlines takes forever (each deal is bespoke) and the upfront capital spend is daunting. These factors will drain profits and cash flow in both 2017 and 2018 more than was guessed 12 months ago. That much is acknowledged both by Inmarsat’s bosses, City analysts and institutional investors.
As to the divergence between the ostensible confidence of Inmarsat’s bosses and the message coming from the share price, Inmarsat’s chief executive, Rupert Pearce, says the seamless coverage provided by Inmarsat’s Global Xpress broadband network puts it in a strong position and that “we are probably doing better than anyone else in the market right now”. Meanwhile, the share price says Inmarsat is a wreck. At 462p, it is 60 per cent below its all-time peak, hit just two years ago. More telling, if 2017’s final dividend were maintained, the dividend yield would be 9.1 per cent. Yields of that level don’t emerge from trouble-free companies. Rather, they signal strongly that the payout is unaffordable and will be slashed. Yet that was the elephant in the room during the company’s Q&A with City analysts for the third-quarter results last month. In a strange dance, both Inmarsat’s bosses and the analysts avoided any mention of the subject.
This has left me reworking my valuation figures. A level of about £11 a share (see Bearbull, 28 July 2017) now looks too optimistic. Focusing harder on cash profits – rather than the accounting variety – reduces the annuity value of the average annual free cash that one could expect from Inmarsat based on the past five years. That value now lies pretty much in line with the share price. Besides that is the great unknown – how much value to give to the barrow loads of capital spending Inmarsat has done in the past five years and will continue to do for another two. Tweaking the assumptions – chiefly, the discount rates used – can generate almost any figure you want.
However, the core message is that the overall value should be – but only ‘should be’ – still well clear of the 462p share price. In which case, I am holding on, but with a sense of foreboding. (Source: Investors Chronicle)
29 Dec 17. Chinese avionics firm raises funds for expansion. China Avionics Systems, a listed subsidiary of state-owned Aviation Industry Corporation of China (AVIC), has issued convertible corporate bonds to raise CNY2.4bn (USD367m) to support industrial expansion, it was announced on 27 December.
The AviChina Industry & Technology Company Limited (AviChina) said in a filing to the Hong Kong stock exchange that the bonds have been acquired by AviChina, AVIC, and its subsidiary AVIC Avionics Systems. AviChina and AVIC Avionics Systems