Eutelsat and SES: Caution is the verdict

Last Friday, both SES and Eutelsat delivered major sets of financial numbers. SES and Eutelsat issued cautious statements, and were marked down by the market. Investment bank Morgan Stanley has put out reports on both satellite operators.

The bank said that Eutelsat’s ‘prudent’ statement “put a damper on its stock price” as CEO Michel de Rosen placed considerable importance on “managing the market’s expectations” and cautioning that 30 per cent growth rates on its military-focused clients would not go on forever.

The bottom line for the bank on Eutelsat was that even though they re-worked the satellite operator’s likely numbers as a result of management’s caution, the bank still viewed the stock as being worthy of an ‘overweight’ ranking. While the bank agreed that certain aspects of Eutelsat’s business would see slower growth, and that some territories (Africa in particular) were experiencing downward pricing pressure, the overall message was strong.

“The penetration of HD within Eutelsat’s portfolio of channels is only 7%, leaving significant room for upside. Eutelsat recorded a 10% increase in the total number of channels broadcast YoY in H1, to 4137 TV channels. TV channel expansion is now mostly driven by fast-growing markets, which account for 54% of the channels on the fleet,” said the bank’s note to clients.

Morgan Stanley’s verdict on SES was less buoyant, saying that the operator’s three-year guidance was “disappointing” and marking its advice down from ‘overweight’ to ‘equal weight’.

There were various challenges for SES, said the bank. “Management highlights several items: (i) AMC-15 and AMC-16 suffered a failure requiring some of the payload to be turned off (ii) Technical issues with the Proton launch vehicle severely delayed the launch of SES-4, which has a knock-on impact on future launches and fleet movements. Future satellites will thus start generating revenue later than expected (iii) The expansion of Services, especially HD+, which are lower margin businesses, will limit group operational gearing beyond our previous expectations,” said the bank’s note to clients.

“SES has many positive qualities,” said the bank. “Revenue backlog is 4x 2011 revenue, barriers to entry are high, and demand for transponders capacity is structurally growing. However, we believe investors do not need to own the shares during the current phase of heightened operational risk and low operational gearing, which will likely continue throughout 2012.”

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