COMPANY NOTE Target | Estimate Change UK | Telecommunications | Telecom Services 9 March 2015 EQUITY RESEARCH (ISAT LN) BUY Inmarsat plc Price target 1,050.00p Clearer and Bluer (from 925.00p) Price 891.00p Key Takeaway Developments since we first looked at the European Aviation Network underpin our conviction on the upside. On US government, we seek to flip the bear Financial Summary case on its head. Finally, we give our take on the AWS-3 auction read across Net Debt (MM): $1,900.7 for Inmarsat. Our Blue Skies analysis now sees a 1,450p (previously 1,300p) valuation within Inmarsat's medium term grasp. Reiterate Buy. Market Data European Aviation Network (EAN). We review industry / Inmarsat / Gogo-related 52 Week Range: 902.00p - 653.00p EUROPE developments since the publication of our "Blue Skies" (25 June 2015) note. Evident Total Entprs. Value (MM): £5,257.2 momentum leads us to reduce the discount on the 240p per share of upside from 50% Market Cap. (MM): £3,993.5 to 40%. This remains an area of the story that is under-represented and under-estimated, Insider Ownership: 0.4% though near-term commercial announcements (of which we envisage several) should snap Institutional Ownership: 80.0% consensus from its slumber. Shares Out. (MM): 448.2 Float (MM): 445.8 Unpicking the USG bear case. There have been concerns that Global Xpress' (GX) Avg. Daily Vol.: 979,366 pursuit of US government revenue in the post-sequester world is a fool's errand. We'd argue the exact opposite: GX's combination of managed service / mobile / global augmentation in the military Ka-band is in the sweet-spot for USG as it embarks on the secular migration to proprietary supply. Sequestration will yet be proven to have played into management's hands. Spectrum. We debate the best way to read the AWS-3 spectrum auction results across to Inmarsat. We conclude that the "bird in the hand" (the co-op agreement) should remain the best valuation steer for investors (and not mark-to-market). Indeed, we are now in the LightSquared "end-game" and Inmarsat, as a supplier to (or even owner of) the business, is very well positioned (specifically, 100-300p per share of overnight upside). L-band surprise. We look at scope for L-band upside surprise given the plethora of growth opportunities Inmarsat has pursued in the past year as it seeks to "innovate, diversify and internationalise" that business. We conclude that 2015 looks to be an exciting year as Giles Thorne * Equity Analyst Inmarsat harvests the seeds of growth it made in 2014, with scope to contribute to consensus +44 (0) 20 7029 8005 [email protected] upgrades. Jerry Dellis * Equity Analyst Valuation/Risks 44 (0) 20 7029 8517 [email protected] Our PT moves to 1,050p, driven by: 1. a lower EAN discount (as above); 2. higher GX revenue Ulrich Rathe, CFA * Equity Analyst assumptions ($550m) on the back of our expectations that the fourth GX satellite will be 44 (0) 20 7029 8286 [email protected] launched; 3. lower tax contingency; 4. USDGBP strength. We revisit our Blue Skies valuation Nicholas Prys-Owen * and now estimate that Inmarsat has a 1,450p valuation within its medium term grasp. Risks: Equity Associate +44 (0) 20 7029 8044 [email protected] third GX satellite launch failure; failure to execute on the EAN plan. * Jefferies International Limited USD Prev. 2014E Prev. 2015E Prev. 2016E Prev. 2017E Price Performance Rev. (MM) 1,263.0 1,285.9 1,265.3 1,260.5 1,415.9 1,412.0 1,552.9 1,544.2 1,000 EBITDA (MM) 669.1 701.0 661.7 659.8 773.5 774.2 897.7 861.7 EV/EBITDA 11.3x 12.0x 10.2x 9.2x EPS 0.48 0.76 0.41 0.43 0.59 0.62 0.88 0.77 900 FY P/E 17.7x 31.2x 21.7x 17.4x Dividend 800 FY Dec 0.47 0.49 -- 0.49 -- 0.51 -- 0.54 Div. Yield 3.65% 3.65% 3.80% 4.02% 700 600 MAR-14 JUL-14 NOV-14 MAR-15 Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 25 to 29 of this report. ISAT LN Target | Estimate Change Inmarsat: ISAT LN 9 March 2015 Buy: 1,050p Price Target THE LONG VIEW Scenarios Target Investment Thesis Upside Scenario Downside Scenario . Core MSS revenue meets guidance of . Core MSS revenue beats guidance of . Core MSS revenue misses guidance “growth” in FY15 (low single digit) “growth” (mid-single digit) of “growth” . Sequestration remains only a short . Replacement capex comes down by . FleetBroadband migration continues term headwind 17.5% to drag revenue . Global Xpress (GX) launched on time . $660 of normalised GX revenue . Sequestration cuts deeper into with solid build-up in XpressLink wins . 100% of ATG / satellite EV government revenue than expected . GX delivers FY13-16 CAGR in MSS . GX revenue misses expectations . $100m LightSquared lease revenue revenue of 8.3% (8-12% guidance) . 2015 EPS of $0.50, re-rating to 45x, . ATG capex and no revenue . 60% probability of ATG network 1480p target price . 2015 EPS of $0.40, de-rating to 30x, . This implies 2015 EPS of $0.43, core 780p target price PE of 37x, 1,050p target price Long Term Analysis 1 Year Forward P/E Long Term Drivers Other Considerations 60x FY14-17 EBITDA CAGR 7.1% . LightSquared Phase 2 payments ($50m Organic Revenue Growth 6.3% per annum, indexed at 3%) have now 40x Acquisition Contribution 0.0% restarted but likelihood of receiving the Operating Margin Expansion 3pp cash is low 20x . Inmarsat has a number of open tax disputes with HMR&C that have been 0x provided for but not paid ($80m in total) 2007 2009 2011 2013 2015 1yr PE Target Upside Downside Source: FactSet Peer Group Forward PEs 2014-17 earnings CAGR vs. P/E Recommendation / Price Target 40 x 20% 31.0x Ticker Rec. PT 30 x SES ISAT ISAT Buy 1,050p 22.0x 22.0x 10% SESG Buy €35.0 20 x ETL ETL Hold €31.0 7.5x 10 x 0% AVN Buy 270p TEF 0 x (10)% I Hold $12.50 ISAT ETL SES I 0x 20x 40x Source: FactSet Source: FactSet Catalysts Company Description . 1Q15 results on 6 May 2015 Inmarsat Plc operates as a provider of global mobile satellite communications solutions. It offers portfolio of solutions and value-added services for use on land, at sea and in the air. I-5F3 launch in 2Q15 It operates through two segments: Inmarsat Global and Inmarsat Solutions. The Inmarsat . Announcement on Inmarsat-5F4, Global segment engages in selling wholesale L-band satellite communications airtime to probably mid-2015 distribution partners, who then on-sell services to service providers and end-users. The Inmarsat Solutions segment operates direct and indirect distribution business, which offers a wide portfolio of remote telecommunications solutions to service providers and end- users, including L-band services. The company was founded on July 16, 1979 and is headquartered in London, the United Kingdom. page 2 of 29 Giles Thorne, Equity Analyst, +44 (0) 20 7029 8005, [email protected] Please see important disclosure information on pages 25 - 29 of this report. ISAT LN Target | Estimate Change 9 March 2015 Reiterate Buy, price target to 1,050p (from 925p) Following the investment in the new European Aviation Networks we moved to a sum of the parts DCF valuation for Inmarsat, splitting out the new venture from the L-band / Ka- band (Global Xpress) businesses. Our PT moves to 1,050p from 925p. The drivers of the PT upgrade are: 1. USDGBP strength since last publishing (0.65 from 0.60); 2. lower base net debt for FY14; 3. lower tax provision following the successful resolution of $50m of the previously signalled $125m of contingent tax obligations; 4. reduced discount on European Aviation Network (40%, from 50%); and 5. increased GX revenue expectations. With a 3.6% dividend yield and 18.1% upside to our PT, we estimate 21.7% twelve month total return and rate Inmarsat a Buy within our ratings framework. Table 1: Inmarsat, sum of the parts valuation Valuation Methodology EV ($'m) FY14 EBITDA FY15 EBITDA EV / 2015 EV / 2016 Stake % Value to ISAT EV per share % of EV ($'m) ($'m) EBITDA EBITDA ($'m) L-band and GX DCF (WACC: 7.9%; Term gr: 1.5%) 8,289.2 649.9 772.5 12.8x 10.7x 100% 8,289.2 $18.49 89.4% S-band (ATG / satellite) As above, 60% probability 981.0 n/a n/a n/a n/a 100% 981.0 $2.19 10.6% Enterprise value 9,270.1 9,270.1 $20.68 100.0% Less: tax provisions (FY14) (80.0) Less: net debt (FY15) (2,013.3) Equity value 7,176.9 Shares in issue (FY15) 448.3 Value per share (USD) $16.00 Value per share (GBP) £10.50 Current share price (GBP) £8.90 2015 dividend yield 3.6% Upside / (downside) 18.1% Total 1-year return 21.7% Source: Jefferies estimates Inmarsat’s multiple upside catalysts justify the high multiple Inmarsat’s 2015 PE of 31x remains excessively high compared to peers on ~21x (Table 2).