Eutelsat’s video revenues still a ‘cash cow’

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A report from investment banker Berenberg on Eutelsat, and especially relevant given the volatile treatment the market has given to key satellite stocks this past week or so, delivers a positive overview of the operator’s prospects.

Berenberg believes that the current perception of Eutelsat is that it faces the same structural issues as listed peers Intelsat and SES, but without the exciting C-band that can help save the day.

“This broad conclusion creates an attractive entry point, in our view. Not only does Eutelsat have different geographic and application exposure to peers – leaving it less exposed to the ‘really bad stuff’ – but its focus on cash flow generation is a key differentiator. Granted, near-term visibility is low and the company has often pushed back its growth inflection point; however, we consider the H1 2019 results a low point, suggest stability can follow, and believe that the argument about whether FY 2020 top line will be up or down by 0.5 per cent is largely immaterial to the value of the company. We also expect Eutelsat to communicate an interesting cash tax saving for FY 2019, and now assume a 30 per cent tax rate in our base-case assumptions.”

The report suggests that Eutelsat’s top-line stability, a near-term cash tax catalyst, combined with an attractive c9 per cent annual dividend yield “leads us to upgrade to Buy with a new price target of €19.00 (25 per cent upside). If Eutelsat negotiated a tax rate of 20 per cent, our price target would increase to €22.10, offering a very interesting 45 per cent upside.”

“While we prudently assume that Eutelsat’s video business never grows again, our three-year CAGR of -1.5 per cent suggests that it is far from Armageddon. With investor focus traditionally on organic growth and EBITDA margin, this is clearly not optimal. However, when we factor in the material capex savings generated when these video “birds” are replaced (most recently, c30 per cent saving on the HotBird constellation), then both EBIT and FCF should continue to grow. Data is arguably a lower-multiple revenue stream, but is likely to grow, and should help to offset video’s declines over the medium term.”

Berenberg admits that the past few years have been tough, and that the bank had believed Eutelsat could return to growth in FY 2019. However, a poor government performance in Q1/2019 has changed our view, and we now expect growth to finally return in FY 2020.”

“We believe the ongoing shift to HD in emerging markets, and to ultra-HD in mature territories, is likely to continue to drive demand for capacity at premium orbital positions, with more mature regions continuing to face challenges.”


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