Is Intelsat worth $22, or a share?

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Analysts at investment bank Morgan Stanley have reduced Intelsat’s target share price from $24 to $22.  Barclays, in their note, suggest a similar figure of $23 although that was some weeks ago. JP Morgan Chase placed a target value of $27. Others have placed a higher value on Intelsat, even as high as $50.

However, all of the valuations assume that the C-Band Alliance (CBA), of which Intelsat is a key partner, will get some or all of the proceeds of a significant auction of C-band satellite spectrum.

Last week Giles Thorne at Jefferies also updated his forecasts for Intelsat following on from the operators Q1 results and the total loss of Intelsat 29e.  His target price has been adjusted downward from $36 to $25 a share, but he gives some very useful background on the question of proceeds from any spectrum auction.

His ‘base’ case is that Intelsat receives just $4 billion net proceeds from the auction. This is still a useful sum and will be assumed to help cut Intelsat’s massive debt burden, which would lower their interest obligations and also fund Intelsat’s proportion of the 8 satellites needed to replace the auctioned spectrum.

As with any ‘base’ case there is a downside as well as a potential upside. Let’s deal with the upside. Jefferies suggests that Intelsat could gain a $6 billion windfall, which would clearly be even more useful in terms of debt repayment. If this should happen, says Jefferies, the target price could rocket to $40 a share.

But then there is the downside scenario. If, following on from the Federal Communications Commission’s decision expected some time later this year, there is only a $2 billion CBA benefit due to Intelsat, then this is not going to materially benefit Intelsat, and Thorne’s target price tumbles to just $9 a share!

Indeed, Jefferies cannot be criticised for this forecast. Intelsat’s position in terms of revenues for this year does not anticipate growth. The next 2-3 years all see negative revenue growth – and absolutely not helped by the loss of I-29e.

However, the next months might also see a favourable FCC verdict, and a benefit closer to the ‘upside’ estimates!


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