Analyst: SES, Eutelsat Attractive for Investors

By | December 16, 2008 | Feature, Telecom

[Satellite News 12-16-08] SES and Eutelsat Communications are attractive propositions for investors in a credit crunch era, according to Morgan Stanley satellite equity analyst Sarah Simon.
    “We are sufficiently relaxed about the negatives of both companies to remain upbeat on their prospects, both on an absolute and a relative basis,” Simon said in “Fixed Satellite Services: Expect Further Out performance,” which outlines prospects for the two FSS operators as well as the sector in general. “Our preference, on valuation grounds, remains SES, but this should in no way detract from our positive view on Eutelsat, also,” she said.
    Simon believes both companies have performed strongly in recent times and confidence in the FSS industry is very different from other parts of the media sector. “Amid the gloom of the media cyclicals (albeit less pronounced than might be deduced from looking at stock prices), the confidence of the FSS companies in their growth prospects was marked,” she said. “Both companies continue to expect in excess of 5 percent compound annual revenue growth over the next three years, despite this being the worst economic situation their industry (which is relatively new) has ever experienced. Strong order books for existing satellites and substantial pre-booking of new satellites means that the risk of both companies missing forecasts is very low, in our view.”
    In term of SES’s growth rate, SES CEO Romain Bausch, when asked whether the operator would have strong growth over the next couple of years, recently told Satellite News that it depends on how strong growth is defines. “We have guided investors to 6 percent-plus over the next two years. We believe this is realistic. However, in the current economic climate, there are exchange rate calculations to be taken into account,” he said.
    While long-term contracts in the video business mean the operators are well-placed to ride out the credit crunch, Simon also is positive about the operator’s prospects in new business areas such as satellite broadband. “We think services, which are seen as somewhat of a dirty word, could drive substantial positive news flow,” she said. “We expect good news from both companies regarding two-way broadband, as deployments continue, however, with SES management having been more circumspect about giving financial guidance for the business, the company may surprise positively on Astra2Connect, whereas for Eutelsat’s Tooway, it may just be a case of meeting expectations, which appear to be already built into consensus.”
    Simon also suggests SES could be having the edge in terms of satellite broadband. “Current figures suggest that SES may be ahead of Eutelsat in terms of current end user numbers,” she said. “While SES management gave figures … that implied that SES will close 2008 with somewhere around 30,000 end users for its Astra2Connect service, according to Eutelsat, its Tooway service has several thousand terminals currently deployed. We were surprised by the magnitude of difference between the two in this regard, particularly as, in perception terms, investors are probably looking for more from Tooway, given that Eutelsat has been relatively clear about the (large) customer numbers that it is targeting.”
    Reduced budgets in other areas also could benefit satellite players. “In the field of U.S. government services, which is extremely important for SES, representing a double-digit proportion of group revenues, constrained national budgets may actually be positive for the commercial satellite operators. For example, the recent cancellation of a large construction program for the U.S. Navy means that the latter will require more third party commercial capacity than would have been the case if it had built its own satellites. This could result in more demand for SES’s government services business.”

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