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Bank: Sky Italia deal could take Eutelsat to €18

September 3, 2020

Investment bank Jefferies, in its report on Sky Italia renewing their long-term distribution contract with Eutelsat,  says that the deal removes a “sword of Damocles” from Eutelsat’s prospects.

“It removes a huge overhand for the stock,” says analyst Giles Thorne. Eutelsat’s share price has been in the doldrums for months, and the renewal news lifted Eutelsat by 4 per cent to €8.55 per share (indeed at one point touching €8.66). But there’s plenty of headroom left considering that as recently as June 9 Eutelsat was trading at €10.50 per share.

The Sky Italia agreement adds some $538 million to Eutelsat’s contracted backlog.

Thorne’s summary has the bank recommending a ‘Buy’ on Eutelsat stock with an impressive target price of €18.50 which would make plenty of patient shareholders very happy.

Thorne says: “With the revenue impact no worse than we anticipated, management must now remind the market that it has renewed a “broadly stable” revenue stream at a significantly lower input cost, and its strategy to maximise Video IRRs has therefore now been achieved (with positive implications for the stock).”

He adds: “The release is light on details beyond a comment of “guaranteeing broadly stable annual revenue in the medium term” (Eutelsat’s use of the word “broadly” suggests low-mid single digit group revenue declines) and an addition to backlog of c.€450m with pre-negotiated options to prolong / increase contracted volumes (based on future plans for compression / ultra-HD). We’d assume the shape of revenue across the contract is of a number of negotiated volume reductions at certain points (i.e. no imminent impact to guidance), but on more-favourable pricing.”

However, there’s a somewhat more subdued note from investment bank Exane/BNPP, which has a less dramatic ‘Neutral’ guidance on Eutelsat for its clients, and a price target of just €10.

Exane/BNPP says the news is a “small positive” for Eutelsat. “Management did say that negotiations were going well at results the start of last month. More generally in Video, capacity pricing trends are stable. It still sees pockets of growth in sub-Saharan Africa but has suffered lower renewals in Greece. Video revenues are seen declining slightly. Receivables are increasing as cash collection is more difficult in a Covid environment. The contract also includes future extension options representing additional potential revenues.”

The bank adds: “Eutelsat has suffered many false starts in the past and the road to balancing the group revenue mix (more structurally appealing Connectivity revenues, less Video) is still long and challenging.”

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