Bank: “Not all satellite broadcast the same”

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Investment bank Berenberg has reiterated its ‘Buy’ rating for Eutelsat and gives the Paris-based satellite operator a target price of €12.75. Its shares were trading on September 14th at about €9.29, and up some 3.75 per cent during the day.

Berenberg’s view is that the recent renewal of some key Sky Italia contracts “provides further reassurances” for the health of Eutelsat. “We have for some time detailed our view that Eutelsat’s satellite broadcast business will be more resilient than peers’ given its superior geographic and end customer exposure. While the company has now reported broadly stable revenues in this segment for 12 quarters, the Sky Italia renewal – representing some 6 per cent of group revenues – provided a near-term test to our thesis.”

The bank admits that many investors were not comfortable with the risks, particularly with Italy pushing for a nationwide fibre network. “However, this catalyst has now come and gone, resulting in broadly stable revenues from Sky Italia well into the medium term. The renewal not only helps to back up our assumptions that Eutelsat’s top line is more robust than those of its peers, but it also vindicates our view that the company’s cash flows and, thus, potential shareholder returns are exceptionally undervalued, particularly compared to peer SES. We reiterate our Buy rating.”

“We have long argued that not all satellite broadcast revenues are created equal,” states Berenberg. “SES and Intelsat, for example, have larger exposure to the US cable market, which does not benefit from expensive switching costs and is a market with higher pricing, so there is more cord-cutting. Satellite is growing in Eutelsat’s footprint, which includes emerging markets, and its “mature” countries, such as Italy, have lower fibre penetrations and/or less attractive Netflix/over-the-top offerings. Although Italy has grand plans for a nationwide fibre network, FTTH Council Europe forecasts that by 2025 only 33 percent of Italian households will have a fibre subscription (versus 72 percent in the UK). Effectively, Sky Italia could not distribute to its households in any other way even if it wanted to.”

The report also touches on the recent gossip – itself generated by Eutelsat CEO Rodolphe Belmer – over a major merger in European satellite. The bank says: “A combination with SES is exciting and would provide numerous synergies. However, even if politicians are keen to create European champions, we envisage regulatory hurdles that could be difficult to overcome. Consolidation outside Europe is more likely, in our view, given the many small country-sponsored players that lack sufficient scale.”


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