To all:
Before Maurice fills this thread with his fiction about the reasons for the downgrade I felt that I would post it in its entirety. I know this is a Globalstar thread but whatever affects one will affect the other, they are two closely related as pioneers in this field for it to be otherwise.
Investment Highlights:
-We are downgrading Iridium to intermediate-term Neutral and long-term Accumulate based on its achievement of our year end 1998 price objective of $54.
-The current price appears to discount fully remaining technical risk, as well as our 1998 subscriber projections, on which we won't have viability until late 1998.
-We expect to need evidence that subscriber levels can exceed our
projections in order to justify higher price objectives.
Fundamental Highlights:
-Iridium has achieved virtually every milestone to date.
-Most recently the company completed a $300 M yield financing with a
11 1/4% coupon.
Opinion Downgrade Based on Price:
We are downgrading iridium to an intermediate-term Neutral and long-term Accumulate based on its achievement of our year end 1998 price objective of $54.
As the company completes the launching and testing of its satellites until April 1998, we expect investors to focus increasingly on the substantiation of market demand. Since the company does not plan to initiate commercial service until September 1998, we expect to have limited evidence prior to that time that the company can exceed our projections of 210,000 subscribers by year end 1998.
Financing and Technical Milestones Achieved to Date:
To date, Iridium's stock price appears to be driven by its consistent achievement of each milestone laid out:
- Financing of its $5B capital requirement.
- Partially re-financed debt guaranteed by Motorola, which
would have required future dilution during the period the
gaurantee remained in place.
- launched 34 out of planned 66 satellites and on schedule to
launch all satellites by April 1998.
- Successfully tested all inter-satellite links.
- Successfully tested paging functions.
- Carried out initial testing of voice channel functions.
- Completed construction of 8 of planned 11 gateways
- Received full l-band licenses in 17 countries and
experimental licenses in 5 countries, which together account
for 45% of cumulative projected demand.
- Comppany expects 40-50 total licenses by year end, representing
65% of projected demand and 90 countries representing 100%
of projected demand by the commencement of operations on 9-98.
Price advances appear to discount technical risk and subscriber demand
Our DCF model values Iridium shares at $54 as of year end 1998, assuming the system is fully operational and evidence of substantial subscriber demand emerges. Specifically, we project 210,000 total subscribers to Iridium's services, including 40,000 subscriber's to the satellite only service, 120,000 subscribers to the universal dual mode satellite cellular service, 20,000 subscribers to the citi-to-city cellular roaming service, and 30,000 subscribers to the company's global paging service. We expect to need evidence that subscriber leveles can exceed our projections in order to justify higher price objectives.
Iridium's current plans call for the distribution of suc\bscriber terminals to begin in summer 1998 and for commercial service to initiate on September 23, 1998. We do not expect to have evidence that subscriber levels will exceed our projections prior to that time.
Potential for upside surprises:
Despite our conservatism, we see at least three potential sources for upside surprises:
1.) Early subscriber adoption. Iridium and its service providers take advance orders from end user prior to 9-98, indicating initial demand levels.
2.) Special deals. Iridium may execute large-scale contracts, e.g. with the U.S. government, or receive bulk commitments under its NOMAD program, that provide strong foundation levels of demand
3.) Valuation, our DCF model assumes a 20% discount rate and a terminal value in 2006 based on a 8X EV/EBITDA multiple. Increasing our terminal value multiple to 10X increases our 1998 valuation to $66.
Alternatively, one can value the company as a multiple to EBITDA in 2002 and then discount the resulting stock price back to 1998. using a 10X multiple in 2002 indicates a 2002 stock prict of $178. Discounting this back at a 30% equity discount rate indicates a 1998 value of $62. Using a 12X 2002 multiple indicates a 1998 value of $76. this valuation approach is based on Iridium capturing 4.2 M subscribers by 2002, of which 2.5 would utilize satellite based services. We are also not comfortable with these higher valuations until further evidence of subscriber demand materializes. On balance we reduce our rating to D-3-2-9.
To the extent investors use alternative valuation assumptions, or upside surprises occur, Iridium prices may continue to increase. We prefer to maintain our currentvaluation assumptions and year end 1998 price objective of $54 until the company eliminates remaining technical risk and further demonstrates the level of subscriber demand. Accourdingly we reduce our intermediate-term rating to Neutral and our long-term rating to accumulate.
end of report
Unfortunately, ML has chosen not to reduce their discount for technical risk even though much of it has been eliminated. Tomorrow or Monday I will post the Dow Jones report mentioned by Jim where other analysts have chosed to raise their price targets due to the achievements by Iridium. In addition, I feel that ML is very uninformed as to demand for this service. Hopefully, this shaky opinion on this field in general will not negatively affect G*. However, it is down another 1+. |
