SES: Risk of satellite over-capacity

The supply of new satellites, and the bandwidth expansion that flows from so-called ‘high-throughput satellites’ such as Eutelsat’s Ka-Sat, suggests to investment bank Morgan Stanley that there could be a serious over-supply of new capacity in the business. Indeed, the bank’s report on Luxembourg-based SES also suggests that the operator might fall short of its own revenue and EBITDA guidance.

The bank says that SES’ formal guidance is to achieve EBITDA growth of 4-to-5 per cent. The bank now anticipates SES hitting only 3.6 per cent EBITDA growth.

The report doesn’t make glowing reading for SES shareholders. Not helping is that SES is currently trading at its biggest-ever premium to arch-rival Eutelsat.

The bank identifies five risks for SES, saying:
We think SES may miss full-year 2013 and three-year guidance.
SES’s valuation looks full and potential earnings downgrades could trigger multiple erosion.

  • Overcapacity could weigh on medium-term profits.
  • Rising competition from high throughput satellites (HTS) and falling military demand create additional downside risk.
  • The dispute with Eutelsat (ETL) at 28.5° EAST could result in lower European revenue growth than expected in 2014.
  • The dispute mentioned by the bank is being adjudicated by a tribunal in Paris, and a decision is expected within about six weeks or so.

“We fine-tune our estimates for 2013/14 and cut them by -3 per cent for 2015-17 to account more accurately for these risks, and cut our target price accordingly. Lack of upside and further potential downside risk lead us to move our rating to a relative UW with a new price target of €21.80 (was €23.0),” added the bank’s report.

SES saw its shares fall 4 per cent on July 16th.

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