Note 1: If you don´t know anything about communication satellites, I
would recommend to read this link communication-satellites-101 before you go ahead.
Overview
With a fleet of 9 Ku-FSS, Ka-FSS and S-MSS, EchoStar (SATS) provides video distribution, data communications, and backhaul services to meet the needs of media and broadcast organizations, enterprise customers, and US government service providers.
Headquartered in Englewood, Colo., and
conducting business around the globe, EchoStar operates two business segments:
Hughes Network Systems and EchoStar Satellite Services (ESS).
According to the last Q3 of 2019,
dated at Sep 30th, EchoStar had $1,841.1m of revenues, $-1.6m of EBIT and total
assets for $7,037.8m.
As of Nov 21th, 2019, EchoStar´s market
capitalization was $3.9B with 97.4 million shares outstanding at a value of
$40.68 each.
History
EchoStar was founded in 1980 by
Charles Ergen with $500k in savings, as a distributor of C band TV systems.
In 1995, the firm launched its first
satellite, EchoStar I. In 1996, it established the DISH Network business to
market its home satellite TV system.
In 2008 DISH Network was spun-off,
so EchoStar and DISH Network operate as separate public companies. However, a
substantial majority of the voting power of the shares of both companies is
owned beneficially by Charles Ergen.
As of Nov 21th, 2019, DISH Network and
EchoStar, had a market capitalization of $20B and Charlie has a net worth of ~$10B
Business Segments
EchoStar has two important businesses,
adding a third “Corporate&Other” not classified in the other two.
1.Hughes Segment
Hughes is the global leader in
satellite broadband for home and office, delivering solutions and a
comprehensive suite of managed services for enterprises and governments
worldwide. Two kinds of customers, two businesses within Hughes, ie: Consumer
and Enterprise.
Hughes is supported by a fleet of 5
Ka-band satellites: Jupiter1, Jupiter2, Eutelsat 65, Telesat T19V and SPACEWAY
3.
2.EchoStar Satellite Service
ESS consists of 2 Ku/Ka satellites
which provide video distribution, data communications and backhaul services to
meet the needs of media and broadcast organizations, enterprise customers and
government service providers.
Hughes Segment Business and Jupiter Satellites
This segment is supported by two
fundamental satellites: Jupiter1 and Jupiter2. What are Jupiter Satellites? and
what can we expect from them?
Over the past several years, a
technology shift has occurred within the satellite industry; as an example: Ka-Band
EchoStar XIX/Jupiter2, launched in 2016, offer 200x capacity compared to legacy
Ku-Band satellites, with in-orbit cost per Gigabyte per Second (Gbps) only a
fraction of older satellites and confirming Moore´s Law.
The number of satellites that can
offer this sort of service is also limited by the number of orbital slots
available and the IP is very hard to recreate. In fact, only two companies fit:
EchoStar and Viasat (VSAT), leaving us with a duopoly market.
Hughes Consumer Business
Consumer Business sells broadband
service to consumers in very rural/underserved areas.
In the last years, Hughes Satellites has
increased its capacity (Gbps) and the Hughes Consumer Business has increased
its number of subscribers, going from 626,000 subscribers and 10Gbps in 2011 to
1,437,000 subscribers and 370Gbps in 30Sep2019. In the next table you can see
this significance evolution.
The cost to build out infrastructure
to underserved households in US is very expensive for cable, DSL or fiber
companies. The Federal Communications Commission (FCC) estimated the cost to
deliver broadband to the 10-20m households in extremely remote areas at approximately
$8-10k per home. A cable company receiving $65/month in broadband revenue ($780/year)
on a average life of four years for a customer and a 18% EBIT margin, spending
$8-10k to receive a total present value of $8,229k in cash flows over the life
of a subscriber, do not seems a good business.
On the other hand, if EchoStar
spends $450m to build a satellite that can service 1m susbcribers who are
willing to pay for higher speeds (25mbps) vs dial-up/DSL (1-5mbps), their cost
to build out to a home is about $500 (including some cost of the modem at the
customer´s home), constituting favorable economics.
EchoStar and competitors Viasat´s
combined 4 satellites can serve 4m customers while the Federal Communications
Commission (FCC) estimates that market size is about 20m unserved/underserved
households in the US alone.
Finally, two more potential areas that
will be satisfied by Ka-Band Jupiter Satellites are: 5G Wireless and Inflight
Broadband Speeds.
5G Wireless is an ultrafast wireless
standard that requires a densified network – ie more wireless towers along with
small cell wireless towers attached to lampposts and in buildings. 5G is also
all about backhaul –when we densify wireless networks with so many more radios,
we need to “trunk” that data back through to the data centers. Trunking is
accomplished through fiber/cable in large cities and satellite in rural areas. Given
their cost per bit advantage in Ka-Band, we could envision an entire fleet of
Echostar satellites across the world trunking capacity in rural areas.
In-flight broadband speeds using
Ka-Band are much faster than substitute products that use Ku-Band. This is a large
and growing market as new satellites are built across regions with aircraft
traffic.
What can I expect from this business
in the next years? We can start by the last data of susbcribers reported which is
1.437 millions, and I have estimated an average annual revenue per user $780, this
give me a revenue of $1,121 millions in Hughes Consumer Business.
I will assume an expected growth
equal the current expected inflation of 1.54% (nominal interest rate minus
TIPS) for revenues per subscriber. Moreover, I will expect 2.735 millions
subscribers around year 3 according capacity of satellites, and stay at this
level forever.
I should advise that I have not
consider any other satellite in the next years, but this is wrong as Echostar
plans to launch Jupiter3 in 2020 adding more capacity and revenues.
Hughes Enterprise Business
Echostar provides of managed network
services for large blue chip and medium/small enterprises across a range of
industries (Lottery, Retail, Hospitallity, Restaurant, Finance/banking,
Oil&gas, Airbone broadband, etc).
Enterprise Business offer
connectivity to business in remote areas (ie all Getty stations outside
cable/DSL footprint for transaction connectivity) utilizing Hughes´s
aforementioned satellite constellations. Similar to the Consumer Business, with
customers in rural areas, this business has little completion and 99% customer
renewal.
In addition, the Enterprise Business
supplies of satellite ground infrastructure and terminals to operators
(Telefonica, Vodacom, IntelSat, EutelSat, GlobalStar, YahSat, BSNL, SES,
OneWeb, etc).
Same question again as consumer
business: what future for enterprise business? We know that Total Hughes
Revenues has been $1,806 millions and resting the amount of $1,121 millions of
Hughes Consumer Revenues, give us $685 millions for Hughes Enterprise Revenues.
I will be very conservative with the
future of these revenues and I will assume a growth in perpetuity of 1.69%
(Risk Free Rate in usd = 10Yr bond usd).
Valuing Operating Assets of Hughes
Business
Following in the next table I
summarize a probable future for the Hughes Segment and operating income in the
next 10 yrs.
I have estimated a current EBIT of
$88.15 millions (previously adjusted to R&D expenses and operating leses, and
after allocated corporate expenses) giving a margin of 4.88%, which I will scale
up to the global industry average of 14.96% plus a 5% premium (19.96%) in year
5 and stay forever at that level assuming Echostar will share the duopoly with
Viasat thanks to its economy of scale.
Tax rate will scale up to the Marginal
Tax Rate in year 10.
I will assume a high capital
investment model with low S/C Ratio. Although current S/C ratio is 0.49, I will
assume that the company will improve progressively up to the global industry
average of 0.99 in year 10.
The company had $797 in NOLs at
30dic18, and that amount must be taken in account in valuation.
Current cost of capital is 9.32%,
and will move towards the global industry average of 6.38% in year 10.
Finally I obtain a value operating
assets about $4,589 millions.
The European Spectrum Business, two probable scenarios
Echostar acquired Solaris in 2013
for $21.8 millions.
Solaris is a satellite company with
30MHZ of S-band spectrum in Europe and a satellite orbital slot. Echostar could
lease the spectrum to wireless carrier and sell satellite service (machine to
machine for logistics management, satellite radio service.. etc).
Users of smartphones are consuming
more bandwidth each year, straining the medium by which the bandwidth is
transmitted, spectrum. As wireless operators scramble to offer higher speeds to
consumers, the value of spectrum will continue to increase.
Echostar is in discussions with
regulators across the EU to repurpose this spectrum for terrestrial use.
Thus, it is probable one of these
scenarios:
Scenario1
Let´s suppose that Echostar receive full approval
from all EU regulators to run a Wholesale LTE Network.
I will consider this scenario as an
option to expand an investment in new markets, to take advantage of favorable
conditions.
Above I detail the inputs to
estimate the value of the option ($1,599 millions) using a Black-Schole model.
Scenario2
If Echostar does not receive full approval from
all EU regulator, the company could launch some combination of a satellite
radio network with a wireless network.
Using the same method as the Scenario1,
I value the option in $913 millions.
Investment in Dish Mexico
Echostar owns 49% of Dish Mexico, an
entity that provides direct-to-home satellite services in Mexico. While
financials are undisclosed, Dish Mexico has grown its subscriber base at
40%+/year and is estimated to have about 5m subs, currently.
While DBS providers in the US and in
other developed nations trade at about $400-600/ subscriber, ARPUs are about
50% lower in Mexico, thus we value the investment in Dish Mexico at $613
millions.
Tying the pieces that I understand
Probably there are more hidden value
in Echostar, for example: what about other minority investments, or what future
could we expect in the ESS segment,.. there are other examples, but my capacity
to discover other value is limited and I have decided to concentrate my efforts
in what I know: Hughes Segment with subscribers in consumer front, Hughes
Segment in enterprise front, the investment in Dish Mexico and the two options/scenarios
of the spectrum in Europe.
Attaching
all these three values, I finally arrive at $69.80 value/share for scenario.1
and $62.77 value/share for a worst scenario.2
