Bank rates SES ‘Buy’, Eutelsat ‘Hold’
March 9, 2022
A report from investment analysts at Berenberg Bank looks closely at satellite operator SES, and maintains a ‘Buy’ rating although the bank softens its Price Target on the operator’s shares, and lowers its target slightly from €10 to €9.80 (today at €6.92).
The bank’s report says that over the next two years SES has three key deliverables. They are:
1: successfully launch 9 medium-earth orbit (MEO) satellites and five geostationary orbit (GEO) satellites in 2022, its peak capex year;
2: complete C-band phase two conversion and receive the FCC’s post-tax proceeds equal to c70 percent of its market capitalisation; and
3: return to revenue and EBITDA growth in 2023, as the company has guided.
The bank says that with its C-band phase one conversion now complete, and consensus forecast momentum broadly stabilised, the bank believes that as SES executes against these deliverables, this should stimulate a re-rating.
Berenberg says that SES is slowly rebuilding trust, commenting: “If SES continues to deliver on its promises, and returns to revenue and EBITDA growth in 2023, we believe this should act to cause a re-rating.”
The bank’s report reminds investors that SES has already banked $1 billion of FCC/C-band proceeds and this has helped SES’s leverage which is now at its lowest level for six years. The larger phase two payment of $3 billion (which will incur 18-19 percent tax levies) is on track to be received around the end of 2023 or in early 2024.
“This represents c70 percent of SES’s market cap and creates optionality for shareholder returns, balance sheet repair and disciplined investment,” notes Berenberg.
The report also looks at the usage of cash from C-band proceeds from the US, saying: “CEO Steve Collar has commented that he expects further industry consolidation, leading some investors to worry that C-band proceeds may be reinvested into M&A. At the Q4 results, Mr Collar commented that ‘we intend to be completely financially disciplined around any consolidation that we’re going to look at, and only get involved to the extent that it’s in the interest of SES shareholders’.”
A separate report from Berenberg on Eutelsat admits bluntly that “there is not much to like in Eutelsat’s standalone investment case”.
On the upside, the bank’s report says that Eutelsat is “cheap [as a share], cash generative and could feature in future consolidation”. Consequently, the bank maintains its ‘Hold’ advice to clients and with a Price Target of €11 (from today’s €8.96 or so).
Berenberg says that Eutelsat is exposed to some 6 per cent of its revenues coming from Russian activity, commenting: “Eutelsat leases capacity on four satellites from the Russian Satellite Communications Company (RSCC). We understand that these operations have been largely unaffected by geopolitical developments so far.”
The bank also says that last September’s flurry of buy-out news from Patrick Drahi has gone quiet, adding “With no obvious strategic angle connected to his other assets, it is hard to say if he will return with another bid; however, the more time that passes since the original bid, the less likely it feels.”
The report reminds clients that Eutelsat’s important DTH Video Broadcast revenues “look challenging” and are expected to continue in long-term decline. Berenberg forecasts a fall of some 6.7 per cent during Q3 (to the end of March) as part of an overall company-wide fall of about 3.3 per cent during Q3.
Berenberg is blunt, and says “Eutelsat has a poor track record of achieving its guidance… With growth expectations now pushed out to 2023/24 and some Russian exposure causing uncertainty, there is not much to like in Eutelsat’s standalone investment case.”
Eutelsat by its divisions
· Broadcast: 61 per cent
· Data & Prof. Video: 14 per cent
· Gov’t services: 12 per cent
· Fixed Broadband: 6 per cent
· Mobile Connectivity: 7 per cent