To all: Here is the most recent Merrill Lynch Equity Research Report
First of all they are maintaining their interim and long term "Accumulate" rating.
- Iridium has nearly reached our $54 price objective.
- Updating our 12-18 month valuation to $82, assuming subscriber
projections met.
- $200 million ad campaign, combined with major sales, e.g. to U.S.
government, should enable company to meet sub numbers.
- Substantial price risk if subscriber levels fall short of
expectations.
- We expect intense competition longer term.
- Changed our model to reflect prices falling more rapidly due to
competition (I wonder if this means they are simply using different
darts?)
FUNDAMENTAL HIGHLIGHTS:
- We believe the company is on schedule to begin commercial service
in September this year.
- We project 160,000 satellite voice subscribers by year end 1998.
UPDATING PRICE OBJECTIVE:
Since its IPO last June, Iridium has achieved virtually every milestone it set out. It remains on track to begin commercial service in September this year. We have updated our models to reflect substantially lower technology risk, now that 49 of 66 planned satellites have now reached orbit successfully, and initial tests show encouraging results. We have also refined our models to reflect our expectation that increased competition should drive down Iridium prices more rapidly than expected. Based on our revised assumptions, we are raising our 12-18 month price objective to $82.
Project remains on schedule.
Iridium remains on schedule to begin service in September. The company has launched 49 of its planned 66 satellites successfully. The company plans two more launches in the next week: A delta II launch of 5 satellites on Thursday, March 26, and a Long March 2CSD launch of 2 satellites from China as soon as weather allows. Three more launches scheduled for late April should complete the constellation.
Motorola has completed 1st round testing of 5 Iridium gateways, and all 12 should be operational by September. Iridium gateway operators have placed orders for 250,000 voice terminals and 100,000 pagers.
178 Service Providers and Roaming Partners (SPRP's) have now signed up to distribute the Iridium service. In aggregate, these SPRP's currently serve 47 million cellular subscribers in regions totalling
2.7 billions people. We expect China to join this group shortly.
37 countries have granted full licenses to the Iridium service and 8
additional countries have granted experimental licenses. The company continues to expect licenses in 90 countries by September.
Lower Prices but Broader Market Expected.
The market opportunity identified by Iridium has attracted numerous followers. Competitor Globalstar should begin service in 1999, followed by ICO and Ellipso in 2000. ACes appears on tract to provide Asian regional services beginning in 1999, followed by Middle Eastern regional provider Thuraya. While none of these operators promises Iridium's global coverage or in-building paging penetration, most promise lower prices. We expect this competitive pressure to push down Iridium prices more rapidly than we previously projected. An offsetting benefit -- the potential market for mobile satellite services should broaden substantially.
Revised Assumptions
Our original Iridium model assumed Iridium would receive a wholesale price of $2.50 per minute, falling to $1.43 by 2006. This price includes both airtime and international long distance charges. Based on falling long distance rates and price competition, we have lowered our assumed pricing to $1.33 per minute, falling to $.76 by 2006. We continue to assume Iridium will invest substantially to capture subscribers, beginning at $750 per new subscriber in 1998, falling to
$300 per new subscriber by 2003
Valuation Raised to $82, Outlook Cautious
To reflect reduced technology risk and be consistent with the valuation of comparable companies, we have modified our valuation parameters. We value Iridium shares in 1999 at $82, based on a 12x EBITDA multiple in 2002, which indicates a $203 stock price at that time and discounting the $203 back to 1999 at a 30% equity discount rate.
Despite Iridium's appreciation potential, we remain optimistic, but cautious as reflected by our Accumulate ratings. Failur to meet investor expectations of subscriber levels could trigger a price correction. |
