This is an exciting time for the satellite industry. Revenue grew by 7% in 2013 and global demand is expected to outstrip supply by 2015. In this briefing we highlight sector trends and 5 key issues to consider when investing.
- Increase in US spending – US Defense Department spending caps have been lifted for the next two years, releasing an additional $20 billion of military funding. This is likely to provide a significant boost for satellite sector revenue streams
- New launches – there has been an upsurge in new satellite programmes. In April 2014, the EU started the roll-out of Sentinel-1a, the biggest civil Earth-observation programme in history ($10.3 billion committed to date). Separately, O3b Networks has recently embarked on one of the most ambitious private programmes to date. Its aim is to connect the ‘Other 3 billion’ in the world without broadband access
- Africa market entrants – the governments of Nigeria, Angola and DRC have all announced significant satellite projects in the past year, prompted by the rapid uptake of mobile devices and internet in the region
- Industry consolidation – the past 24 months have seen increased deal activity to create economies of scale and improve geographical reach. Key players including Eutelsat, SES and Arabsat have all made acquisitions. Canada’s Telesat is currently up for sale.
5 issues to consider when investing
- Deep dive into customer contracts
The revenue generating capability of customer contracts will be key. For example, contracts with government customers are typically only for 1-2 years. The term, termination and renewal provisions of core revenue generating agreements need careful scrutiny.
- Status of technology
Satellites have a relatively short technology shelf life, typically between 15-20 years. It’s crucial to diligence the age and performance of satellites in orbit to determine whether new investment will be required to maintain revenue levels.
- Supplier risk
The satellite industry is a small world. It’s common for key pieces of technology to be provided by just one supplier. A sole-source supply chain is a risk, and a ‘Plan B’ will be needed to avoid exposure in cases of product defect, IP infringement and insolvency.
- Launch delay
This is the biggest concern in any programme. Even a small technical error can cause huge losses. Supplier contracts need to contain robust launch delay provisions to protect against missed milestones and liability exposure.
- Government policy
The industry is heavily reliant on large-scale government investment. A reduction in spending or change in policy can have a material impact on revenue. Government proposals should be closely tracked.