Shin Satellite Plc. (SATTEL)
reported worse-than-expected 2002 earnings of Bt1,410.5mn, a
decrease of 10% from 2001. SATTEL's core revenue improved
just 4% to Bt4,997mn, mainly due to 1) lower transponder
revenue from the strengthening baht against the US dollar
and 2) the cancellation of service to some clients following
the adoption of a stricter credit policy to control bad
debt.
Meanwhile, SATTEL's cost of
service rose by 13% partially due to a 5% increase in
revenue sharing last September. Also, iPSTAR equipment sales
at low margins, as well as an increase in staff costs to
support business expansion of both iPSTAR and CamShin,
resulted in operating margins falling from 37% to 27% in
2002.
Although SATTEL's retained
earnings turned positive in 3Q02, SATTEL recently announced
that it will forego dividends from 2002 operations, as the
company is preparing to spend US$390mn, or Bt17bn, on its
new broadband satellite – iPSTAR.
iPSTAR is expected to be
launched in early 2004 and will be funded by Bt6.6bn
internal cash flow and Bt10.4bn project financing loan. At
the end of 2002, SATTEL already spent Bt8.8bn on this
project, funded by Bt6bn internal cash flow and Bt2.8bn
short-term and credit financing, which later would be
replaced by its project long-term financing. During the
construction process of iPSTAR, interest expenses will be
capitalised to the cost of project. However, this huge
investment project has already raised SATTEL's
debt-to-equity ratio from 1.13x in 2001 to 1.5x in 2002.
We are still confident that
SATTEL has a healthy financial position with Bt16.5 book
value per share, Bt3.6 operating cash flow per share and
5.3x interest coverage ratio. Also, SATTEL's share price is
trading at a cheap valuation of 2x PER, 0.6x P/BV and 1.5x
EV/EBITDA. Based on DCF, we value SATTEL at Bt28 prior to
factoring additional future cash flow from iPSTAR project.
However, there are several
uncertain factors to limit its share price recovery in the
near term. Firstly, the likely loss of Indian government
contracts will reduce its transponder lease revenue by 6.9%
to Bt440mn in this year.
Regarding the problem with
power supply system, the incapacitated 10 Ku-band
transponders on Thaicom 3 may not affect the company's
current operation. But we believe it will definitely affect
the company's future growth potential, especially the lost
opportunity to employ its unused satellite capacity in
offering a first generation of iPSTAR system. We are also
uncertain whether the company has to write-off the loss in
10 Ku-band capacity in its book. As a result, we are
maintaining our current recommendation of HOLD.
