Bank downbeat on SES, upbeat on Eutelsat

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Investment bank Berenberg, in its previews of media stocks for 2021, is downbeat on satellite operator SES. It is maintaining its ‘SELL’ advice to clients and gives a guide price for SES shares of just €6.80 per share.

The bank downgraded SES last year and says it remains of the view that consensus forecasts will fall short this year, and that SES is now a riskier proposition than peer Eutelsat (which it recommends as a ‘BUY’).

The bank says that the global resurgence of Covid-19 looks set to further delay recovery in the travel market, particularly long-haul, such that:
a) minimum revenue guarantees will prevail (unless SES releases customers from contracts); and
b) it will take longer for SES to sign backlog on the €1.7 billion of satellite capacity that is set to launch in 2021 and 2022.

“We note the booming C-band auction, but the reality is that this will benefit the FCC/US economy and not SES (or its satellite peers), which have accepted fixed incentive payments that are not directly linked to auction proceeds,” says Berenberg. “Consensus forecasts are for 10.6 per cent growth in the segment in 2021, but we believe mobility revenue will be flat at best. Quarterly revenues since the pandemic began suggest that usage is at or below minimum guarantee levels. Moreover, two of SES’s largest mobility customers have minimum guarantees in 2021 that are lower than in 2020, making it likely that revenues will actually decline y-o-y. In due course, mobility will of course recover, but in the short to medium term we think there are risks to forecasts in this regard.”

“SES’s backlog has been declining, despite the increase in the size of the fleet (in physical terms) and value (net fixed satellite assets). Moreover, because SES is delaying payment for SES-17 and the O3b mPOWER fleet, net fixed satellite assets as stated on the balance sheet are lower than where one would normally expect them to be (in a scenario when capex is paid in advance of launch). In short, SES is investing more aggressively, but does not appear to be delivering in terms of backlog. This situation certainly will not be helped by a prolongation of the relative shutdown in terms of international air travel and cruising.”

Meanwhile Berenberg has chosen Eutelsat as one of its key investment opportunities for this year, and is reiterating its ‘BUY’ rating on Eutelsat.

Berenberg, in a note on media to clients, say that it believes Eutelsat shares continue to look cheap and that c5x EV/EBITDA and a safe 10 per cent annual dividend yield fail to reflect the company’s risk profile appropriately.

“While somewhat unusual, the reason for our opposing views on Eutelsat and SES is that, over the past few years, there has been a significant divergence in the financial and operational strategies of the two companies which has resulted in SES becoming a much more risky proposition, in our view. We believe Eutelsat’s focus on FCF generation – leading to a secure double-digit yield – and its favourable customer and application mix mean it should trade at a premium to its counterpart. However, EV/EBITDA multiples are broadly in line and SES trades at a significant premium on EV/OpFCF. We thus think there is considerable downside to SES’s share price and reiterate our Buy rating on Eutelsat with a slightly lower price target of €12.00 (versus €12.70 previously),” states Berenberg.

The bank’s report admits that Eutelsat’s Video/Broadcasting division have been a “touch disappointing” it nevertheless sees momentum being built within Eutelsat’s Fixed Broadband activity. “We have recently recorded some interesting new contracts with Orange and TIM, highlighting the place that satellite broadband has even with terrestrial fibre roll-outs. We also believe that the acquisition of Bigblu Broadband Europe makes a lot of sense, providing Eutelsat with the ability to sell capacity in countries where wholesale agreements pricing (such as those with Orange and TIM) would not pass Eutelsat’s return thresholds. We expect news-flow to remain supportive over the coming 12 months.”

Berenberg has issued a price target for Eutelsat shares at €12 which is a little lower than the previous €12.70 per share.


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