The Investment Column: Space is risky but Inmarsat is on growth trajectory

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The Independent Online

Our view: Buy

Share price: 484.25p (-0.75p)

Investing in the satellite sector is traditionally quite a risky move, with many billions of pounds burnt up in the atmosphere over the past decade. Yet since debuting on the London Stock Exchange in mid-2005, Inmarsat has proved a good bet, with the shares currently trading at double the IPO price on the back of stellar revenue growth over the past two years.

Last week the UK company confirmed that it had signed a deal with the European Space Agency to develop and launch Alphasat, the most advanced satellite for civilian applications. The £360m project has been supported by three regional development agencies which have pumped £36m into the project in order to secure hi-tech jobs in the South-east.

Alphasat, which will be five times more powerful than existing satellites, will support high-bandwidth broadband services in remote areas, strengthening Inmarsat's BGan service, which is racking up subscribers in the maritime and disaster relief industries.

The satellite will boost Inmarsat's capability and capacity, supporting accelerated revenue growth. However, it will also lead to significant investment – some £190m – between 2008 and 2013. Capex will be mostly back-ended, as launching the super-satellite is a costly exercise. However, Alphasat will increase the company's spectrum in Europe, the Middle East and Africa by some 30 per cent.

Inmarsat's valuation is certainly rich – it trades at over 46 times 2008 forecasts – although analysts argue that the company is cheaper based on other valuation metrics and that the increased capex will not derail the company's dividend policy. The company could also be stung by the weak US dollar as 60 per cent of its cost base is in sterling. However with strong growth potential in the maritime sector for broadband services, and the long-awaited in-flight voice and data services picking up in 2008, Inmarsat's valuation looks underpinned by strong revenue growth over the coming decade. Buy.

Big Yellow Group

Our view: Sell

Share price: 435p (-5p)

Big Yellow Group has had a torrid year. After hitting all-time highs of more than 700p a share on the first trading day of 2007, the stock has been in permanent decline ever since.

Yesterday, as the self-storage company announced a £150m partnership deal with Pramerica Real Estate Investors, to develop up to 25 more stores across the Midlands, Scotland and north of England, the shares bounced as much as 4.4 per cent before resuming normal service, and closing the day down 5p at 435p.

So what is it that investors don't like about the group? At first glance, it's hard to say. The company has been very successful in the self-storage market over the past few years, stealing share from its competitors by placing its warehouses in convenient central urban areas, rather than out of town on remote industrial estates.

It has maintained a relatively healthy yield on its portfolio, and has made a good success of launching new outlets to achieve steady growth.

The problem is that slowing house prices and a fragile economy have the power to derail Big Yellow's progress. With more than half of the group's customers accounted for by home movers who need somewhere to store excess possessions whilst in transition, the slowdown in the housing market is bad news.

Meanwhile, the outlook for commercial property is not so hot either, meaning that companies like Big Yellow may see the value of their property portfolios fall at the same time that they are struggling to fill their free space.

Although long-term prospects for this group look promising, the short-term outlook is bleak. Investors should sell their holdings and seek shelter elsewhere.

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