SES upgraded by bank, but with caveats
February 12, 2021
Satellite operator SES will unveil its half-year numbers on February 25th. Analysts at investment bank Berenberg have upgraded their advice on the company to clients to “Hold” but has more than a few cautions in a report.
Currently SES shares are trading at sub-€7 levels (€6.84), a little better than its yearly low which was €5.07 in April last year but well down on the €17-€18 per share position in 2019.
Berenberg gives a target price now of just €6.80 which must depress many long-term shareholders. But the bank’s rationale is inescapable: “While we do not expect particularly positive guidance for FY 2021, we feel that the current valuation now broadly prices in our below-consensus estimates. We continue to believe that street estimates are too optimistic as regards mobility revenues in 2021, given continued lockdowns which will sustain the negative trend in global aviation and cruising; although, on the plus side, it is possible that SES will maintain the temporary (Covid-19-related) cost savings for longer. Overall, we now expect a balanced risk/reward, hence the upgrade to ‘Hold’ on unchanged estimates.”
The bank admits that key to some optimism is SES drive towards greater revenues in its Mobility and Networks division. “We think street estimates are too high as regards the timing of recovery. Mobility revenues in Q2 and Q3 2020 were broadly the same as in Q1 2020 (mostly pre-pandemic), despite the collapse in post-pandemic utilisation. This suggests that it was contractual minimum guarantees that were driving revenues rather than usage-based income. Our analysis of two large SES mobility customers, however, suggests that minimum guarantees could decline this year, and given that we do not expect usage to return to Q1 2020 levels for some time, this implies that mobility revenue could actually decline in 2021. Consensus, though, is for low-double-digit growth.”
However, the bank’s major worry focuses on the satellite operator’s all-important Video division and its historic high margins: “While mobility will undoubtedly recover (albeit we think business traffic will take longer to return to historic levels than that driven by the leisure traveller), the longer-term argument against the video business continues to grow, in our view. With more and more players seeking to bring high speed broadband to underserved areas (eg 5G, LEOs, O3b, Eutelsat’s Konnect), the ability to stream video should steadily increase, thus increasing the pressure on satellite distribution. SES is partly hedged, of course, through its O3b operation, but the reality is that the margin on video is higher, and competition lower, than for fixed data services.”
Berenberg admits it prefers Eutelsat. “In this context, we think Eutelsat is a safer way to play the satellites. Unlike SES, which has a major capex programme underway, Eutelsat should generate positive FCF this year and next, and it offers a high-single-digit dividend yield, nearly double that of SES. Of course, SES will ultimately benefit from C-band incentive payments, but we do not expect any cash return until 2024 at the earliest (and note that SES’s capex programme will reinvest more than the entire after-tax C-band monies).”