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Bank: SES has begun recovery

June 13, 2022

Analysts at Berenberg Bank has issued a positive note to clients on satellite operator SES, saying that while its business is doing well – and its share price reflects this – it still has three key challenges over the next two years. The bank has reiterated its ‘Buy’ rating on SES and raised its target price to €11.20 (from €9.80).

Over the next two years, Berenberg says SES has three key deliverables:

1) launch nine medium-earth orbit (MEO) satellites and five geostationary orbit (GEO) satellites in 2022, its peak capex year;
2) complete C-band phase two and receive post-tax proceeds equal to c55 percent of its market cap; and
3) return to revenue and EBITDA growth in 2023.

“We believe that, as SES executes against these, the shares should re-rate further. Therefore, we reiterate our Buy rating, and increase our price target to €11.20 (from €9.80),” noted Berenberg.

The bank’s report reminds investors that each single basis-point in the €/$ exchange rate adds about €8 million to revenue and €4-€5 million to its EBITDA, “but is almost neutral at the cash-flow level”.

On the highly-positive side of the revenue statement is the $3 billion or so reward from the FCC for SES allowing its C-band frequencies over the US to be repurposed for 5G. The bank says: “The larger Phase 2 payment of $3 billion (which will incur 18-19 per cent tax) is on track to be received around the end of 2023 or in early 2024. This represents c55 percent of SES’s market cap and creates optionality for shareholder returns, balance sheet repair and disciplined investment. SES also announced a further agreement with Verizon in March that will earn SES an additional $170 million through accelerated clearing of C-band spectrum.”

But this represents a risk, or perhaps an opportunity. Berenberg adds: “One pushback is the risk that SES reinvests C-band proceeds into M&A. SES does little to downplay this, continuing to argue for industry consolidation. That said, investors have reacted well to the vertical acquisition of Leonardo DRS’s Global Enterprise Solutions (DRS GES) for $450 million, announced in March and expected to close in H2. We have incorporated this acquisition into our forecasts. The deal will boost SES’s government operations, while achieving c$25 million pa of synergies in three years, largely by increasing DRS GES’s usage of SES’s satellites.”

This year, the bank reminds investors, is the year of launches for SES. In a few days is the launch of its latest geostationary craft (by SpaceX).

“Capex in 2022 is set to quadruple as SES launches nine MEO and five GEO satellites. With a robust contract backlog for SES-17 and O3b mPOWER, trends will improve in the latter part of 2022, before SES returns to revenue and EBITDA growth in 2023, as guided,” adds the note.

Berenberg also reminds investors that the operator’s exposure to Russian risks are minimal (less than 0.5 per cent) and might even benefit from increased governmental and defence/military use of its satellites.

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