A major report from investment bank Berenberg on satellite operator SES maintains the company’s “HOLD” rating but with a severely reduced target price of €8.40. As recently as February its target price was €14.90, and in November 2019 was €18.
The bank is blunt, saying that SES has failed to deliver on its revenue guidance in 2019 and has lowered its aspirations for 2020. “We believe that the new expectations are realistic, albeit at the low end of the range. Video remains the key problem, but the run-rate of growth for Networks in 2019 was below expectations and management has moderated its expectations for expansion in 2020 accordingly.”
Berenberg says that the operator’s balance sheet problems have not gone away. “Halving the dividend for 2019 was in theory already priced in, but does not resolve the leverage issue. SES is committed to being investment grade, ie at 3.3x net debt/EBITDA or lower. The problem is that the capex spike in 2021 will leave the group at 3.6x, on our estimates. While clearly SES can run with leverage exceeding 3.3x, we think its core shareholder – the Luxembourg government – wants a solid investment grade rating. Maybe it will take the C-band monies into account, but these are contingent on an on time completion of the spectrum repacking, and will not be paid out until 2022/2024. We think there is growing likelihood of a capital increase in the next 12 months.”
The report adds: “Raising the prospect of an IPO of Networks: SES’ likely capital needs may be behind the possible spin-off of the Networks unit which management now says is under consideration. Timing-wise, it makes sense to look at an IPO/private placement prior to the entry into service of the multiple LEO constellations (which we think will compete with some parts of Networks), and as revenues ramp on SES-17 and O3b MPower. A well-timed fundraising could also help Networks spend on further investment, which seems to be where management wants to take the business.”