Reliance On Lightspeed Amid Starlink Competition Will Pose Revenue Risks

Key Takeaways

• Telesat's shift from GEO to LEO satellites risks short-term profitability due to high capital expenses and staffing needs, affecting margins and earnings.
  
• Heavy reliance on Lightspeed's market success amid Starlink competition threatens future revenue growth and customer acquisition goals.
  
• Fully funded Lightspeed project and strategic partnerships enhance customer engagement, market position, and revenue prospects while operational efficiencies and cost reductions improve margins.

Catalysts

A satellite operator, offers mission-critical communications services to broadcast, enterprise, and consulting customers worldwide.

• Telesat's planned transition from GEO to LEO satellites involves a large upfront capital expenditure and staffing increase that could weigh on short-term profitability, impacting both net margins and future earnings.
  
• The significant reduction in revenue from DISH Network, with a 70% decline over the current contract duration and uncertainty about future arrangements, could put downward pressure on Telesat's revenue and earnings.
  
• The disposal of the InfosSat subsidiary for minimal financial gain indicates non-material impact from asset disposals, which may limit improvements to net income.
  
• Challenges with existing GEO customer contracts, such as financial restructuring of clients like Explore and unresolved litigation with Shaw, could lead to continued revenue instability and affect future cash flows.
  
• Telesat's heavy reliance on Lightspeed's successful market entry, amid competition from Starlink and expected advancements in satellite internet technology, poses a risk to achieving their revenue and customer acquisition goals, possibly influencing future revenue growth trajectories.

Telesat Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telesat's revenue will decrease by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach CA$15.2 million (and earnings per share of CA$0.71) by about February 2028, down from CA$49.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 124.6x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the CA Telecom industry at 9.5x.
• Analysts expect the number of shares outstanding to grow by 3.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

Telesat Future Earnings Per Share Growth

Risks

• Telesat has fully funded its Lightspeed LEO project, leading to increased customer engagement and raising prospects for future revenue growth from anticipated contracts and partnerships. This could positively impact revenue.
  
• The temporary reduction in operating expenses due to lower noncash share-based compensation and increased capitalized engineering for Lightspeed suggests potential improvements in net margins as operational efficiencies are realized.
  
• The decline in interest expense due to debt repurchases and favorable foreign exchange movements is expected to positively influence net income by reducing overall financial costs.
  
• High customer interest in LEO capabilities and partnerships, such as with Viasat, may contribute to future earnings by capturing demand for innovative satellite solutions in various verticals, enhancing Telesat’s market position.
  
• Ongoing discussions with potential customers and government entities about utilizing Lightspeed services indicates potential for additional earnings streams and expansion into diverse markets, potentially increasing revenue stability.

Valuation

• The analysts have a consensus price target of CA$28.658 for Telesat based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$43.27, and the most bearish reporting a price target of just CA$14.05.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$544.9 million, earnings will come to CA$15.2 million, and it would be trading on a PE ratio of 124.6x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of CA$28.44, the analyst price target of CA$28.66 is 0.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.