Market over-reacts to potential loss of Thaicom 3 transponders 

Shin Satellite Plc. (SATTEL) shares plunged 12.86% yesterday to Bt12.2 – the lowest level over the last 53 months – due to market concerns about possible failure of a solar panel on Thaicom 3. SATTEL shares had already been hit by a string of negative news, including loss of contracts with the Indian government and riot damage to the head office of its Cambodian subsidiary.

The problem appears to be quite serious as the management waits for the conclusion of investigation by its team of engineers and the satellite manufacturer. Currently, a problem with Thaicom 3’s solar panel is affecting 4 of the 14 Ku-band transponders, but not the 24 C-band transponders. SATTEL’s management clarified, however, that it is able to migrate its existing Ku-band customers to Thaicom 1 and 2 satellites. However, the loss of Ku-band capacity would affect SATTEL’s future growth prospects, particularly the plan to pre-market iPStar using Thaicom 3’s Ku-band capacity. If the problem cannot be fixed, we estimate that SATTEL’s earnings would need to be revised down by 6.1% and 5.4% in 2003 and 2004, respectively.

Based on our forecast, SATTEL would lose Bt3.3bn in future Ku-band revenue if the Ku-band transponders cannot operate, representing a net present value of Bt1.9bn. The loss in future cash flow would result in a 15.2% lower DCF valuation to Bt28 per share.

SATTEL depreciates the total investment cost of Thaicom 3 over the estimated useful life of the satellite (1997-2011). Based on our own rough estimate, the loss in 10 Ku-band capacity would require a write-off of approximately Bt737mn. However, SATTEL would still be in a very solid financial position. The company currently has a net debt-to-equity ratio of only 0.3x.

We believe that investors should not sell SATTEL shares at this current low price. However, we won’t encourage investors to buy either until more information is available. As a result, we are downgrading our short-term recommendation on SATTEL from ACCUMULATE to HOLD.

• SATTEL informed the market last Friday about a problem in the power supply system of its Thaicom 3 satellite following an anomaly with one its solar panels. This incident caused temporary outages on some services, particularly Ku-band transponders. The company is still waiting for the result of an investigation by its engineers and those of Alcatel Space, the French manufacturer.

• Thaicom 3, a geo-synchronous (GEO) orbit satellite, was launched in April 1997 with 24 C-band and 14 Ku-band transponders, occupying 78.5 degrees east orbital slot. Thaicom 3 satellite was supposed to have 7-8 more years of useful life until 2011. SATTEL’s management also clarified that the loss of the one solar panel would not affect the ability of the satellite to remain in orbit for its remaining estimated useful life.

• At present, Thaicom 3 satellite is currently utilising 90.4% of its 24 C-band transponders and 44% of its 14 Ku-band transponders. The management commented that the power supply problem is having the biggest impact on some Ku-band transponders, which consume more electricity. As a result, the 24 C-band transponders are still operating normally. The electricity power is still enough to operate 4 of the 14 Ku-band transponders. Therefore, only 2.2 in-use transponders are directly affected from this incident.

• The company has already transferred all leased customers on the 2.2 Ku-band transponders to Thaicom 1 and 2 satellites. The management has confirmed that the under-utilised capacity of Thaicom 1 and 2 can handle the migration of customers. As a result, most of SATTEL’s existing customers won’t be affected by the Thaicom 3’s technical problems.

• Previously, we had factored in earnings growth in SATTEL’s financial projections due to increasing utilisation of Thaicom 3’s Ku-band transponders. If we assume permanent loss of the 10 Ku-band transponders, we would need to revise down our revenue projections by 4.5% and 4.2% for 2003 and 2004, respectively, and earnings projections by 6.1% and 5.4%.

• Based on our current forecasts, SATTEL would lose Bt3.3bn in Ku-band revenue over the remaining useful life of Thaicom 3, representing a net present value of Bt1.9bn. Since we primarily value SATTEL’s shares on a DCF estimate, we would essentially lower our fair value estimate by 15.2% from Bt33 to Bt28. Our valuation currently excludes the iPSTAR project.

• The loss of part of SATTEL’s Ku-band capacity could also affect the company’s new satellite project, iPSTAR, since the company was preparing a soft launch using its surplus Ku-band capacity. This will also affect earnings as SATTEL may not be able to sell set top boxes for its preliminary iPSTAR terminal service this year. However, there is no need to adjust our forecast, as we had not factored in this potential earnings source. Also, we believe that lenders to the project may be more reluctant to lend to the project without the soft launch, even though customers have already booked 30% of iPSTAR’s capacity. According to the company’s schedule, the management will soon call a meeting with its credit committee and iPSTAR manufacturer, Loral, next month.

• SATTEL depreciates the total investment cost of Thaicom 3 over the estimated useful life of the satellite (1997-2011). Currently, SATTEL has Thaicom 3 on its books at Bt2,800mn. If we assume that the company depreciates the investment cost per transponder, the loss in 10 Ku-band capacity would require a write-off of approximately Bt737mn.

• We believe the market has over-reacted to this news. Based on our revised assumptions, SATTEL is currently trading on very cheap 2003 PER of 3.36x, EV/EBITDA of 2.72x, P/BV ratio of 0.59x or a 56.43% discount to our fair value estimate of Bt28.