Bank: “BUY Eutelsat, SELL SES”

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A pair of detailed reports to clients from investment bank Berenberg makes for good reading for Eutelsat but delivered negative advice as to the state of prospects for arch-rival SES.

As for Eutelsat, Berenberg’s analyst Robert Berg says that the satellite operator’s shares are “still cheap”. The bank’s note says: “We reiterate our ‘Buy’ rating on Eutelsat, even though we have downgraded SES, its key European peer, to ‘Sell’. Traditionally the two companies were hard to separate but, over the past few years, there has been a significant divergence in their financial and operational strategies, a divergence that we think has resulted in SES becoming a much more risky proposition. We believe Eutelsat’s focus on Free Cashflow generation – leading to a secure double-digit yield – and its favourable customer and application mix mean it should trade at a premium to its Luxembourgish counterpart.”

However, all is not absolutely clear sailing for Eutelsat. The bank adds: “Management commentary suggested we should expect a slightly deteriorating trend in both the broadcast and government segments through the remainder of the year, which was a touch disappointing. However, momentum seems to be building within the fixed broadband division, with some interesting new contracts, and mobility revenues – considerably affected by Covid-19 – were supported by better-than-expected maritime trends. With FY21 guidance (to June 30th 2021) reiterated, we keep our near-term forecasts broadly unchanged.”

The bank says that Eutelsat’s sell-off of its KA-SAT satellite makes sense. “Following its acquisition of Bigblu Broadband Europe in July, and the recent entry into service of Eutelsat’s Konnect satellite, the company last week disposed of its remaining interest in its KA-SAT satellite to ViaSat. Eutelsat’s focus for fixed broadband growth is now clearly on its own open Konnect architecture, rather than a legacy KA-SAT proposition reliant on ViaSat’s hardware. We thus feel that monetising the remaining stake in its KA-SAT joint venture makes a lot of sense, not only operationally, but also financially, as the €140m received at c7x EBITDA is far in excess of the group multiple.”

Eutelsat’s share price closed November 26th at €9.58. Berenberg has given the company a price target of €12.70.

Then the bank turns to SES and says it is downgrading the operator to “SELL” on valuation grounds. Analyst Sarah Simon says: “While vaccine-based optimism has prompted a rally in SES’s share price, we think SES specifics are more relevant. In our view, revenue and EBITDA will fall short of consensus forecasts in 2021 and 2022, with mobility in particular likely to disappoint. Meanwhile, SES’s backlog to fixed assets ratio continues to decline even prior to spending on SES-17 and O3b mPOWER, capacity for which pre-sales appear limited. While we now have relative certainty on C-band, SES’s plan to reinvest more than the entire post-tax proceeds on new satellite capacity increases the risk profile given limited pre-sales. On valuation, if we strip out C-band proceeds, we find SES to be trading at a modest premium to Eutelsat on EV/EBITDA; however, SES’s cash flow profile (negative in 2021 and 2022) suggests that it should trade at a discount. We retain our €6.80 price target but downgrade to ‘Sell’.

Berenberg gives its other key reasons, saying: “Looking into 2021, we believe that forecasts for mobility revenues are too high, notwithstanding vaccine news. For while we expect air travel to increase gradually as restrictions are lifted, it is short-haul that is likely to lead the way. The problem, though, is that there are air-to-ground alternatives to satellite for short-haul routes. Separately, as we have previously highlighted, two SES mobility customers – Gogo and Global Eagle – have minimum guarantees for transponder capacity that are lower in 2021 versus 2020, and in 2022 versus 2021. This reflects previous utilisation growth forecasts that obviated the need for revenue guarantees. However, post-Covid-19, utilisation will clearly be far lower, which, given declining minimum guarantees, suggests mobility revenue will fall in 2021. Yet consensus forecasts 13 per cent underlying growth in 2021.”

The bank is also concerned about the all-important contracted backlog at SES, saying: “While SES has recently renewed a number of video contracts, signed new government business and is also pre-selling throughput on SES-17 and O3b mPOWER, the backlog is declining, both in absolute terms and relative to fixed assets. With €2.6 billion of fixed asset spending (€1.7 billion of which is on SES-17 and O3b mPOWER) set to enter the balance sheet over the period 2021-2024, we expect this ratio to fall further. Backlog includes $500m related to the aforementioned projects, which were announced in 2016 and 2017 respectively, but most of this relates to an agreement with Thales, announced in 2016. With limited addition to the backlog since then, this suggests increased probability of declining returns on those projects.”

SES shares closed on November 26th at €7.95 after a 5 per cent fall. Berenberg has given the company a target price of €6.80.


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