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Bank reviews Eutelsat vs SES

March 18, 2021

Analysts at Berenberg Bank have compared and contrasted Europe’s two satellite giants SES and Eutelsat in a detailed report.

SES has a balance sheet that is in good shape says Berenberg but, despite its larger size, will generate much less cash flow than Eutelsat in 2021 and 2022, and, given uncertainty about the long-term future of video, “we prefer to take our money now rather than later”, says the bank.

The report also issues a warning over SES’s future trading prospects, saying that information from some of SES’s largest customers “implies that contracts include declining minimum guarantee fees in 2021 and 2022, suggesting that usage must compensate. Given our view that mobility service usage will remain well below 2019 in 2021, we thus anticipated flat to declining revenues in the sub-segment (versus consensus forecast of over 10 per cent growth).”

The bank’s major concern focuses on SES’s core Video business: “The outlook for video is a 6-9 per cent organic decline in 2021, following an 8 percent fall in 2020. Management is focused on reducing the pace of decline over the medium to long term. However, in the near term, Nordic pay-tv consolidation will result in multiple transponders being returned in 2021 and we expect Echostar/Dish to pay less for wholesale capacity following the expiry of contracts with SES at the end of 2021. Thereafter, the decline may be more modest, but, as noted on the results call, the weighted average duration of the backlog is only six or seven years. At that point, high speed broadband coverage (and affordability) will likely be much improved, making it ever easier to shift from linear to streaming. We thus believe there is a clear risk that the decline in video in western markets could then re-accelerate and, given video’s superior pricing, put pressure on long-term profits.”

There’s also the near $4 billion dividend due to SES from the FCC’s ‘C-band incentive plan’. The bank says: “While receipt of the C-band monies will be a positive, it is clear that all of the first payment will be used for reduction of debt levels, which remain high. Given business risk, it is too early to think about share buybacks in 2024 as a reason to be buying SES. We thus stay at ‘Hold’.”

Berenberg has more optimism for Eutelsat on which it recommends ‘Buy’ to clients. The bank’s view is helped by Eutelsat’s clutch of recently signed contracts which provide some much-needed visibility on the satellite operator’s future prospects.

“While both companies talk of a return to growth in 2023, high capex results in SES generating significantly less cash flow than Eutelsat in the interim period. Continued uncertainty surrounding the long-term future of video leads us to prefer cash flows now rather than later,” says the bank.

The report adds: “Better-than-expected momentum in the company’s traditionally weak data and professional video segment was the key driver of outperformance with better volumes (rather than price) a nice positive surprise. Profitability too was solid, with EBITDA margin of 76.7 per cent ahead of a consensus forecast of 76.2 per cent. While granted these do sound like small beats, slightly slower-than-expected declines not only gives us more comfort that the company can eventually return to growth, but also signals the end to a long period of underperformance.”

“One of the key drivers of our Buy rating is our view that Eutelsat can return to growth in FY 2023 and that the company’s c10 per cent dividend yield fails to not only reflect this, but also ignores the relative strength of Eutelsat’s cash flows and balance sheet. We believe recent deals struck with Thales, Orange and TIM, combined with the recently awarded further European Geostationary Navigation Overlay Service (EGNOS) will alone add more than €35m (or 3ppt) of annualised revenue during FY 2023. With the top line declining just 2 per cent in H1, it is really starting to feel like Eutelsat’s growth is becoming ever more visible,” concludes the report.

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