SES/Eutelsat: Lift-offs and let-downs

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A major report from equity analysts at Exane/BNP-Paribas examines prospects for Europe’s two major satellite operators.  The report does not make happy reading for investors.

Lead satellite analyst at the bank, Sami Kassab, reminds investors that over the next two weeks three new satellites will go into orbit, two from SES and one from Eutelsat. “Successful launches could trigger some share price relief. However, for SES we do not expect the positive momentum to last with consensus earnings downgrades looming. We continue to prefer Eutelsat (Outperform) in this structurally challenged industry.”

“Successful launches of SES-14 (January 25th) and SES-16 (January 30th), both with pre-sold capacity, should increase the probability of a return to revenue growth this year. This should also help to ease growing concerns on dividend sustainability. A confirmation of a flat dividend (c.10% yield) at the FY17 results publication on February 23rd may trigger a relief rally after the stock’s around 40% underperformance over the last 12 months,” says Kassab.

“We consider these launches as positive catalysts for the share price. According to management, over 30% of these satellites’ capacity has been pre-sold. SES will start recognising the related revenues as these assets enter into service.”

There’s also a strong cautionary note from Kassab as regards ‘entry into service’. “We also believe consensus might be too optimistic on the operational service date of upcoming launches (as we were until now),” warns the bank. “Note that SES-15 was launched in early May 2018 and was supposed to enter into service by end-2017. It is now scheduled for February 2018, up to three months later than originally planned (and assuming all is well with the craft). Like SES-15, SES-14 and SES-12 are hybrid satellites embarking digital processing technology for the first time. Entry into service might take longer than the expected launch + six months due to additional testing requirements.”

The report continues with its focus on Eutelsat: “Eutelsat’s share price has been under pressure since the revenue warning on the delayed launch of its leased Al Yah 3 satellite. This satellite is now scheduled for a launch on 25 January. This, coupled with guidance of a return to top-line growth in H2-18 could support the share price in the short term. Longer term, Eutelsat’s geographic and strategic focus suggests it is best positioned amongst satellite operators, in our view. The group reports H1 17/18 results on February 16th.”

The bank repeats its previous guidance, saying it continues to believe Eutelsat is best placed amongst satellite operators thanks to its focus on countries with lacking terrestrial network infrastructure, its focus on cost optimisation and its focus on Video DTH and Residential Broadband (which offer higher barriers to entry than the Data segment). “We estimate that c.60% of group revenues and probably around 70% of group EBITDA are derived from Video DTH and Residential Broadband. These two segments offer high barriers to entry and should enable the group to capture the benefit of the ongoing phase of technological innovation and the related capex efficiency gains without price erosion.”


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