A report to clients by investment bank Exane/BNPP states that the company’s decision to cut by 50 per cent its dividend to shareholders (to €0.40) looks like a “draconian measure”.
Sami Kassab, Exane’s satellite analyst, issued an “outperform” rating on SES based on the pretty miserable closing price on March 2nd at €7.26 – and all-time low – and a 30.08 fall in one day’s trading. He issued a Target Price of €11 which in itself is hardly a challenge given the benefits that will flow from the C-band windfall,
During CEO Steve Collar’s call with analysts he explained how the plan was to split the business into two: the low-performing and slowly declining Video division from the much better performing Networks division.
Kassab reasonably suggests that dividing the business would mean a much better value for each unit. He says: “[rival satellite network operators] Viasat and Iridium currently trade on 10.9x and 14.5x EV/EBITDA respectively. SES Networks is in structural growth mode with a sustainable competitive advantage (MEO/GEO combination) and attractive bandwidth economics on mPower (probably better than OneWeb’s). It deserves a 10x EV/EBITDA multiple in our opinion.”
Kassab adds: “We also believe the FCC will maintain the share of C–band payment going to SES in its final order, which we estimate is worth €6.6 per share. Combining these three elements points to a fair value of €11 per share, which we set as our new target price.”
The Exane report lists in its view the important elements from Steve Collar’s analyst discussion, saying:
– One-third of the Video revenue decline is due to management’s decision to exit unprofitable or low margin video services business and two-thirds relate to the structural reduction in capacity consumption, largely due to the US market.
– Delays in US government implementation held back Government revenue growth in FY19. Without those delays management argues that Government would have grown high single digits instead of the +5 per cent reported.
– Management mentioned that the C-band proceeds will go toward deleveraging, growth investments and a return to shareholders. While management said this is no change from previous guidance, we found the explicit reference to a return to shareholders as new and supportive.
– Management continues to expect the group to return to revenue growth (undated) thanks to its investments in O3b mPower, which has signed its first three customers.
– With regards to the newly announced separation of SES Networks and SES Video, management is not excluding a merger of its Video business (potentially with Eutelsat’s?). While such a move is not in focus or planned, management has claimed that consolidation will be helpful.