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Re-ratings for SES and Eutelsat

The opening day (March 7th) of the annual Satellite 2016 conference and exhibition in Washington DC will have plenty of topics to cover. High amongst them will be a provocative 30-page report from equity analysts at Deutsche Bank was issued late in the evening of March 4th.

The report doesn’t make good reading for Paris-based Eutelsat. Equity analyst Laurie Davison reverses the bank’s previous “SELL” guidance on Luxembourg’s SES and now recommends investors to “HOLD” the stock, not least because the operator’s share price has fallen some 30 per cent this past year.

However, the bank’s advice to clients with Eutelsat shares in their portfolio changes from “HOLD” to “SELL”. Davison says “We have also become more concerned about Eutelsat’s strategy under its new CEO”.

Davison adds: “We had seen ETL as less exposed than SES to the industry pressures on the core Video income stream. This view still holds, but SES stock has fallen 30 per cent since start 2015, while ETL is flat.”

As to Eutelsat’s new CEO, Rudolphe Belmer, who took the helm on March 1st, it seems that 4 full days (and participating in one results presentation) in the job have not – yet – impressed Deutsche Bank. “Our meeting with him and company management has pointed to two areas of particular focus which give us concern. Consumer broadband (KA-SAT) is the first. Eutelsat has wildly overestimated this opportunity in the past and fibre and 4G coverage plans are constantly being upgraded. In just the past 3 months we have seen a raft of extensions to coverage from European telcos. Also, the [recently announced] ViaSat joint venture is no panacea; Europe is a far less favourable market than the US due to shorter loop lengths and more forceful regulation for universal coverage. The second area of concern is hoped-for pricing rises in key orbital positions. HOTBIRD is key here at 25 per cent of Group revenues and 35-40 per cent of earnings. But ETL has failed to achieve even inflation-linked price rises in recent years and demand conditions are getting worse. At its February results, Eutelsat revealed falling TV channel count, [and] compression pressures are only just starting and the Vivendi restructuring could lead to renegotiations from NC+ and Orange France.”

Davison admits that Deutsche Bank’s review on both companies “differ significantly from [the market’s] consensus.”

Indeed, a recent note to investors from Exane/BNP-Paribas took a quite different view of Eutelsat, and included its new CEO specifically, saying: “We welcome the openness, understanding and mindset of Rodolphe Belmer and share his vision of where he wants the group to go. His knowledge of the broadcasting, telco and B2C worlds are likely to prove valuable assets,” stated analyst Sami Kassab.

He adds that the new CEO has a three-pronged focus. “He will continue to push for growth in EM where demand is strong. He plans to review the distribution model on mature video hotspots by increasing the share of direct distribution in order to improve monetisation. For the long term, he will focus the group on more video interactivity services, in part with the wider roll-out of Eutelsat’s Smart LNB technology. This bodes well for Video profit growth.”

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