Last bull falls:
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ING Barings Satellite Research Group
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March 27, 2000
Globalstar Telecommunications Ltd
(OTC: GSTRF-16)
Globalstar- Substantially Cutting Numbers and Rating to Hold - ATTACHED
ú We are lowering our projections significantly, which has resulted in a
lowering of our YE01 price target from $28 to $12 using a DCF valuation. We
feel compelled to cut our rating on Globalstar to Hold from Strong Buy at
this time. We believe that there is potential for significant downside from
even current levels as performance results from the first quarter begin to
disseminate.
ú First quarter results should be anemic, revenues should be less than
$700,000.
We believe that revenues for the first quarter will be less than $700,000 as
compared to our recently lowered projection of $5.1 million. Further, we
estimate that only 1,000 fixed site units have been ordered by service
providers, a disturbingly low figure as compared to management's plan to
have 40,000-50,000 fixed units installed by service providers this year.
ú We are lowering our subscriber estimates for the fourth time in past 6
months, this time even more drastically.
We are lowering our estimates for both mobile subscribers and fixed site
units by a substantial margin for this year and future years. For '00, we
have cut our mobile subscriber estimate by more than 50% to 150,000 from our
previous 328,000. Also for '00 we have cut fixed sites unit projections by
75% to 10,000 from 41,000. Looking out to '02, we have cut our projections
on mobile subscribers also by 40% to 1.250 million from our previous 2.028
million and cut fixed sites for the same year 72% to 60,000 units from our
previous 211,000 units.
ú Potential for significant financing requirements in '01 & '02.
Based on our current estimates, Globalstar could have a cash requirement of
over $800 million before the end of '02. Consisting of $200 million in '01
and $600 in '02.
ú We estimate that only 1,000 fixed site units have been ordered,
significantly below expectations.
We believe that roughly 1,000 fixed site units have been ordered by service
providers to date, significantly below our previous estimate of 3,150 for
the quarter. This gives us little confidence in management's plan to have
between 40,000 and 50,000 units installed this year. As a result, we are
lowering our projections for fixed site units this year to 10,000 from
41,000. We point out that changes in fixed site forecasts have a
meaningful affect on our model as we have expected each fixed site unit to
consume roughly 400 minutes of use per month.
Iridium's turn-off should be nominal to Globalstar
Iridium has roughly 55,000 subscribers that generate around $1.5 million in
monthly revenues. We these subscribers are likely to be split between
Inmarsat and Globalstar.
Change Mobile Subscriber Projections/ Fixed Units (00's)
'00 '01 '02 '03
Mob| Fixed Mob | Fixed Mob| Fixed Mob | Fixed
Old 328 41 928 128 2,028 211 2,228
297
New 150 10 650 40 1,250 60 1,970
120
Discussion
ú We would love an opportunity to raise our forecast, but deployment
continues to disappoint
We are making these changes to our model despite the fact that we have been
long-term Globalstar bulls. We continue to believe that Globalstar will not
meet the same fate as Iridium's because of its favorable cost/capacity
structure. We have consistently maintained that Globalstar will need (and
has the flexibility) to get prices to a very low price point in order to
stimulate market demand in places where phones do not currently exist, the
question now is - at what price to investors?
Reasons for our Changes Now:
ú Slow roll-out of enabled territories-
Less than 15 gateways are up and running today, leaving important
territories without service. A good example of this is the gateway in
Puerto Rico, which is not expected to go on-line until September. This
gateway will cover the entire Caribbean, Florida and parts of South America,
a potentially fertile ground for Globalstar with commercial and pleasure
boaters as well as vacationers throughout the region.
ú Alarmingly low fixed site unit orders a red flag in our view-
We have believed for some time that the fixed site terminals could represent
a lucrative, high minute of use opportunity. If this is the case, then why
have are not the service providers pre-ordering thousands of these terminals
to install into their regions in places like Mexico and Brazil.
ú Still no partnership in Asia -
We have been expecting Globalstar management to announce service provider
partners for important territories such as India most of Asia (non-China)
for more than a year now. With regional projects such as ACeS and Thuraya
making excellent progress in these territories, we are concerned that
Globalstar may be too far behind in some of these regions.
Financial Discussion:
By lowering our subscriber projections as described above, our revenue,
EBITDA and earnings projections decline significantly over the next few
years. For 2000, we are now projecting revenues of $33 million from our
previous $91 million resulting in an EBITDA loss of $147.8 million for the
year as compared to our previous EBITDA forecasted loss of $92 million. EPS
projections go from a loss of $3.14 to a loss of $3.25.
Looking out to 2002, we are lowering our revenue forecast by 45% to $503.9
million from $915.6 million. This results in our EBITDA forecast declining
by 55% to $321.5 million from our previous $718.8 million. EPS outlook is
lowered from a loss of $0.11 to a loss of $0.98.
The most important point out to consider is future financing requirements
that we are projecting; $200 million in '01 and $600 million in '02. In
terms of '00, we believe that Globalstar will not require additional capital
assuming a $250 million revolving credit facility backed by partners
including Lockheed Martin is extended. We point out that this facility is
not currently drawn upon. Technically, Globalstar is in violation of the
loan's covenants.
Our price target is derived by using a discounted cash flow model using an
18% discount rate. |
