After looking closer at Inmarsat's proposed plans for an in-flight broadband network, broker Jefferies is increasingly optimistic the satellite company could warrant a valuation of £13 per share, an upside of around 80%.
Jefferies debated the idea that the extra investment would "push back" a long-awaited holiday in the group's capital expenditure (capex) and associated impact on shareholder returns.
Previously rating the proposed satellite/air-to-ground (ATG) network as a "scaled, un-replicable, structurally superior proposition in an, effectively, greenfield market with massive potential", analyst Giles Thorne and team have looked deeper into the project, especially reading across from US-based Gogo's highly comparable in-flight business, and are even more bullish.
Compared to Gogo, which has been monetising its network in the US since August 2008, the analysts concluded that Inmarsat's proposition is superior, with 10 times as much spectrum, GX roaming capability, higher barriers to entry.
The analyst team also suggest the shareholder returns profile is more compelling than some investors perceive.
"Investors have been concerned that newly announced ATG/satellite network investment will push back the long awaited capex holiday and associated free cash flow ramp/deleveraging. While some push-back is inevitable given the associated capex cost of the new network, the investment is not so large as to completely erode the capital returns story."
On Jefferies' new capex forecasts, Inmarsat is still expected to deleverage over the short term and on a five-year view, the broker still estimates enough leverage headroom to allow for a buyback of up to 28% of its equity so as to maintain 2.5-3.0 times leverage.
"Of perhaps far greater importance is that the new investment is going to generate significant share price upside for investors," it said.
On its most conservative assumptions, Inmarsat's long-run European "gross passenger opportunity" could be over 300m passengers annually, giving an estimated $1.2bn of retail revenue at a take rate of only 35% and €8 per in-flight internet session.
While the current valuation is full, at 27 times 2014 earnings, the marginal investor now faces "material upside from a range of catalysts", also including the new Global Xpress superfast broadband network and optionality from troubled US broadband partner LightSquared.
A 920p price target is based on "conservative assumptions for the ultimate performance of the business", not least a 50% "investment risk" discount applied to its standalone valuation of the ATG/satellite business of 240p per share. A more optimistic estimate of 2014 EPS of $0.50, implies a 1350p target price.