Satellite Connectivity Popular with Investors

I imagine it is rather more peaceful orbiting the earth than actually running one of these satellite communications firms given the news flow surrounding Inmarsat Plc (LON:ISAT) and the intense strategic positioning taking place in the TMT sector. Investor sentiment is generally positive towards satellite service providers but there have been clouds over Inmarsat due to the recent sale of a 14% stake by their strategic shareholder Harbinger Partners. As we will see, investor sentiment is supportive of Harbinger’s recent capital re-organization. However, Iridium Communications (NYSE:IRDM) and SES (EPA:SESG) witness a degree of short selling that is worth investigating.

Inmarsat Plc has plenty going for it. Founded in 1979 they have 3 Geostationary satellites that offer close to constant global communication coverage. They have residual income from providing communication to ships and aircraft but have ambitious plans, in progress, to offer mobile satellite devices to main street. But their most crucial venture is their co-operation agreement with LightSquared, since this will soon offer wireless satellite connectivity for several US states and will earn revenue by leasing this to mobile carriers keen to offer their customers “always on” connectivity for a handsome fee (LightSquared is majority owned by Harbinger funds). Finally, Morgan Stanley report from their recent TMT conference that “demands for spectrum (by phone operators like AT&T) are ‘grossly underestimated by the market’” and this will help LightSquared who have spectrum to sell. 1.6m bandwidth hungry iPad’s have already been sold.

Short interest in Inmarsat is at a 3 year low and has not been high since early and mid 2008. There has been some confusion in the correct publicly available numbers for stock on loan in Inmarsat. In our opinion, this has been misleading by incorporating trades that have nothing to do with short selling for directional or hedging reasons. On the flip side, institutional investors hold lots of ISAT and have been recently adding to their holdings to reach a 2 year high. Today, 16% of the full float sits in the hands of institutional funds who lend their shares.

Harbinger retain a significant stake despite halving it this summer. The media has reported that their sale had more to do with internal wrangling with investors over concentration risk in the portfolio than a view that Inmarsat is a bad company. In fact, our data doesn’t not show a general lack of faith in Harbinger’s strategy at all. An amazing 22.6% of their public entity – Harbinger Group (NYSE:HBG) is held by asset managers who lend. This is a higher proportion than Heinz currently. This would not include hedge fund ownership.

Harbinger group Inc, which is majority owned by various Harbinger funds, recently raised USD 350m in a bond sale. Are these popular with those same long only managers – yes! This isn’t surprising with a 10.625% yield and a 5 year life span. 6% of the issue value has been taken up by these funds since the 15th November.

So what of Iridium The company saw a leap in stock on loan in late June this year from 2% to 10% of all shares and these short sellers managed to time the peak in the share price since it then fell. Despite a recent rebound, stock on loan hasn’t reduced much and sits at 9%. There are at least two schools of thought here since long only funds are actually increasing their stake. With a reliance on US Government contracts and 66 in-orbit satellites to maintain, one can see why investor sentiment is divided.

SES owns the Astra satellite and is bringing Europe 150 TV channels in HD. The popularity of HD could be the reason long only funds keep buying more shares. They now own around 60m shares or 17.5% which is a 2 year high. Stock on loan is, however, gently rising to 35m shares with some investors perhaps seeing headwinds.

In the words of singer Dave Matthews in his smash hit, Satellite, “like a diamond, in the sky, how I wonder” we also wonder quite how much of a diamond investment these companies will be.

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