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Shares in satellite services operator Inmarsat are 4-5% offside this morning after management capitulated, doing the last thing you want to when trying to keep investors from jumping ship – slash the dividend – in an effort to preserve cash to help the business bounce back from a tough period by being able to invest in growth opportunities such as in-flight wifi. However, this has slashed the income that had been keeping the loyal onboard as well as the attractive yield that had been offering at least some support to the share price amid a protracted downtrend.
And that’s not all. Q4 revenues may well have come in at the top end of consensus, 2018 guidance may well be unchanged at $1.3-1.5bn and management may well be forecasting mid-single digit percentage growth for the next five years. So far so good.
However, much the same way as ‘driving’s for show and putting’s for dough’ in golf, profitability (adjusted EBITDA) missed analyst estimates. There is a lack of visibility on future cash payments from a key client as well as caution on government contracts (26% of group revenues, 35% of adj. EBITDA) due to budget constraints. And CAPEX of $500-600m is now forecast all the way through 2020. This means more cash out the door and, in the take-no-prisoners world of results-day digestion and share price reaction, remember that revenues are vanity, profits are sanity but cash flow is reality. And if the spending doesn’t pay off…..
The real kicker this morning, however, is likely the annual dividend being cut to 20c, down from 54c in 2016 and a reduced 33.6c in 2017. We have also seen the final dividend for 2017 being cut to just 12c even after August saw the interim hiked by 5%. This depresses the future dividend yield to just 3.3%, from a previously difficult-to-ignore 8%, reducing the shares’ attractiveness to bargain hunters and income seekers alike.
The move is an effort to preserve cash, and follows the 2016 introduction of a scrip div option designed to do the same and keep frustrated shareholders on board. The efforts may well succeed, and the shares are already off their worst levels, however today’s move has done nothing to overcome the 45% downtrend that kicked off last August following disappointing H1 results.
Mike van Dulken, Head of Research, 9 Mar 2018
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
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