Eutelsat a “top share pick”

A major study from investment bank Exane BNP Paribas highlights Eutelsat as one of its ‘top picks’ in the media sector for 2015. Other companies in the bank’s ‘Large Capitalisation’ top listing are WPP, JC Decaux and Walters Kluwer. Other outperformers (although not Top Picks) include Vivendi, BSkyB, Pearson, Pro7 and Informa. The bank is “Neutral” on Publicis, ITV, SES and Mediaset.

Exane BNP Paribas says its overarching themes found in its top listing are: “[A] savvy use of cash, improving returns and, if possible, low valuation in absolute (WPP, WKL) or by historical standard (JCD, Eutelsat).”

The bank refreshes its late November 2014 ‘Christmas Cracker’ overview of Eutelsat and SES, authored by Executive Director  Sami Kassab reminding readers that “Satellites feature in Media indices but share little in common with many Media companies. Barriers to entry are high and revenues are secured by long-term contracts. Limited cyclicality, high margins and double-digit returns underline the defensive appeal of this sub-sector.”

“However, this rosy picture has been tarnished by concerns about the introduction of Ka-band High Throughput Satellites (HTS), which combine much lower transmission costs and much higher transmission capacity. While the market has dwelt on the cannibalisation risk for ‘traditional’ satellite operators like Eutelsat and SES, this overlooks the fact that 1) broadcasting (80 per cent+ of their EBITDA) is not suited to HTS technology and 2) HTS provides new opportunities, notably in the data segment.“

“Disruptive innovation in the launch industry is benefiting satellite operators and should lead to sharply reduced capex per transponder. The recent success of the first SpaceX low-cost launch vehicle – putting pricing pressure on a segment traditionally controlled by heavyweights such as Arianespace – combined with the growing adoption of solar electrical propulsion (SEP) could eventually reduce launch costs by 40 per cent and capex per transponder by c.20 per cent.

The report continues: “We have had meetings with more than 15 companies, including launch providers, satellite manufacturers, managers of national satellite operators and CTO’s of the Big 3 satellite operators. While we see attractive prospects for satellite operators generally thanks to improving FCF (lower capex, steady margins), we favour Eutelstat (+,€30 TP) over SES (=,€30 TP). In our view, Eutelsat is poised for accelerating top-line growth, powered by fleet capacity expansion into EM and an increasing number of satellite TV channels while we see SES organic revenue growth temporarily slowing down in FY15 due to the lack of capacity expansion.”

SES is not ignored, despite its ‘Neutral’ rating by the bank. “SES’s fleet has had some technical issues which required replacement capex ahead of schedule. This could put some pressure on returns and limit top line growth due to the focus on the mature North American market of the upcoming SES11. It has also seen its market share of DTH packages erode on the 83E-124E arc and lagged Eutelsat on the 65W-129W over the last 12 months. We expect organic revenue growth to slow down in FY15 to 2 per cent before reaccelerating to 5 per cent in FY16 due to capacity expansion.

“We like the prospects for O3b (45 per cent owned by SES), but believe this is already captured by the current share price. We value both SES Global and O3b using a DCF, based on our central scenario of capex efficiency gains. Our DCF terminal value assumes a 20 per cent decrease in average capex per transponder versus current levels.

We initiate coverage on SES with a Neutral rating and 3 per cent upside on our €30 target price. The stock trades at the high end of its P/E range, largely penalised by O3b startup losses, which cost 1 to 1.5pt of P/E15e. While SES is a clear market leader, its valuation looks full.”

The report also embraces Ultra-HD, saying there are other growth opportunities. “In Video, the key growth drivers include additional channel launches in emerging markets, the current migration to HD and the upcoming move to Ultra HD (UHD). In September 2014, 60 per cent of all screens sized 60’’ or bigger were UHD. Given the public enthusiasm for UHD screens, we believe that broadcasters will gradually roll out UHD channels. Indeed, Direct TV announced in its Q3 14 conference call that it planned to launch its first UHD linear channels in 2015. Similarly Sky Perfect TV intends to launch its first two UHD channels in Japan In March and April 2015.”

“The rise in the number of TV channels and the adoption of the format supports our view of steady growth in demand for satellite capacity (3 per cent CAGR 2013–16e, Euroconsult). Growth is expected to be strongest in Latin America, the Middle East, APAC and Russia/Central Asia. Demand in Europe and North America is seen as flat.”

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