Paris-based satellite operator Eutelsat has had a torrid time lately with investors extremely jittery over the company’s longer-term prospects. The main cause of their anxiety is that – suddenly – their clients are going to switch from satellite DTH transmission as consumers dump their services and instead choose OTT suppliers. Indeed, the past few weeks have not helped with the likes of Sky UK and James Murdoch also saying that OTT delivery is high on their agendas.
Dig a little deeper however, and the statements from Sky and Murdoch are simply referring to reaching those consumers either not able to put up a dish, or to supply cut-down packages to bring more subscribers into the fold.
This message is fully understood by equity analysts at investment bankers Morgan Stanley, which in a 30-page major examination end up raising its rating and advising clients that Eutelsat is now considered “Overweight” and with a €20 price target (February 20th trading was at €17.73).
Morgan Stanley’s Patrick Wellington says the market has overestimated the impact from Eutelsat’s admitted headwinds, most of which have been or are being remedied. Indeed, the bank’s ‘bull/optimistic’’ case sees the share price potentially reaching €26.
Wellington says: “The reason why Eutelsat is so lowly rated then, and the crux of the bear argument, is the idea that the Video business is structurally flawed. The argument says that the rise of OTT services will spell the death knell for satellite delivered linear channels and that the 65 per cent of Eutelsat’s business in this area will crumble. This argument has gained currency from a form of US cultural hegemony that states that the US cord cutting/shaving experience will necessarily be followed everywhere else in the world in the same style. It is a compelling but flawed argument, in our view.”
His report continues: “The evidence is for the continued growth of worldwide linear channels (India is bigger than the US), for resilient live linear viewing even in the US (the US Video Advertising bureau has millennials watching live more than 80% of the time) and for the coexistence ex the US of OTT and linear channels. In the UK, for instance, video on demand services of the Netflix-Amazon style tend to be used as additions to existing pay TV services rather than replacements. As BARB says ‘We are slowly but steadily becoming more willing to accept the idea that we need more than one pay TV service: in the two and a half years since Q1 2014, the proportion of pay TV homes with more than one service has increased from 19% to 32%. This means that 21% of all UK TV homes now have more than one form of pay TV.”
Moreover, Morgan Stanley remind investors that Eutelsat has near-zero Video revenues out of North America. “Its focus in Video is Europe and emerging markets, often those (like Poland, sub-Saharan Africa, the Middle East) patchily covered by fibre. Our view is that Video will sustain its revenues in the next five years. It may not show much growth. We have a Eutelsat Video compound organic revenue growth rate FY16-21 (estimated) of zero. It does not need to. We estimate this will be enough to support Eutelsat to an overall level of modest group revenue growth.”