Advanced Television

SES and Kabel-D make bank’s Top 20

October 18, 2011

Satellite operator SES and German cable giant Kabel Deutschland both make Morgan Stanley’s stock pick of “20 for 2015” which the investment bank says helps identify those companies with long-term sustainable competitive advantages.

KDG, says the bank’s report to investors, “is Germany’s largest cable TV operator (by revenues), Europe’s largest cable TV company and amongst the top 3 global cable companies (by homes passed). Its high quality modern network covers 13 of the 16 German states, 15.3 million homes passed and c. 8.8 million basic cable subscribers. The footprint includes the largest cities and is mainly densely populated (good for cable). KDG benefits from its modern cable network (built by DT) in the 1980s-90s. Of the 15.3 million homes built, 12.1 million have been upgraded, enabling KDG to offer digital TV, broadband and telephony. The network is highly scalable but core and other maintenance capex is low.”

The bank says KDG has been consistently able to offer customers faster broadband at prices at or below those of its peers. DT has struggled to respond given the potential negative impact on its legacy business of ‘dual play’ price reductions, while the cost of roll out of FTTH appears prohibitive. DSL-based competitors can offer similar price points but struggle to match KDG’s price/ broadband speed offer.

As to the future “KDG’s core strategy is the Mission2-20 plan aimed at driving up RGUs per sub to 2 from the current level of 1.45 and the ARPU per sub from the current €13.98 to €20 per month. KDG has seen consistent growth in both measures in the last decade irrespective of German economic conditions. KDG benefits from customer growth, gradual ARPU increases driven by increased take-up of broadband and telephony and high operating leverage with a 65-70 per cent EBITDA margin on incremental revenues. Capital intensity is beginning to decline, resulting in reducing leverage and the prospect of cash returns.”

SES, says the bank, “will benefit from global demand for transponder capacity [which is] poised to grow in the medium term, driven by the accelerating take-up of HD / 3D both in mature and in emerging markets, the proliferation of digital channels in emerging markets, and growing demand from government services. A strong balance sheet and well-timed launch schedule led SES to commit to a €3 billion five-year capex plan designed to boost transponder capacity by 23 per cent by 2014 and targeting especially fast-growing emerging markets. High operational gearing (>70 per cent) and the deconsolidation of low-margin ancillary activities should lead EBITDA margins to rise from 70 per cent in 2009 to 76.5 per cent in the mid-term. Finally, due to the phasing of its replacement cycle, SES expects the current unusually high level of capex (€771 million 2010, €920 million in 2011) to drop sharply to €440 million in 2013 and €250 million 2014-16. In addition, while the absolute cost of a new satellite is stable, the return per new satellite is increasing as the latest launches carry more transponders. Therefore, falling capex from 2013/14 and increased returns per satellite should drive >€4 billion FCF generation 2013-2017 (55 per cent of current market cap). This firmly underpins SES’ commitment to grow the dividend year after year (current yield is ~5 per cent).”

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