[Satellite News 05-16-11] European satellite analysts’ continue to remain positive on the satellite sector after noting the latest results issued by European FSS heavyweights Eutelsat Communications and SES. In its third quarter results, Eutelsat saw an impressive 10 percent increase in its overall revenues in the three months to the end of March. The operator had total revenues of 295.2 million euros ($416.54 million), an increase of exactly 10 percent compared with the same quarter last year. In a research report issued on the operator’s results, Julien Rossi, a satellite equity analyst at Morgan Stanley, said the investment bank remains “upbeat” on the FSS sector. “The fixed satellite service industry presents numerous advantages in an uncertain market environment. Demand for transponder capacity is poised to grow over the next three years, driven by (i) the accelerating take-up of HD/3-D in mature markets (ii) the proliferation of digital channels in emerging markets, and (iii) demand from government services,” he says.

     Rossi believes that Eutelsat is well positioned to deliver strong growth in the short- to medium-term. “Eutelsat plans to launch an additional six satellites by the end of calendar Q1 2013, after having successfully launched Ka-Sat in December 2010. These satellites will increase the group’s transmission capacity by 273 transponders on top of the 82 spot beams on Ka-Sat. For modeling purposes, we assume one spot beam equals one transponder. This means that between December 2010 and June 2013, Eutelsat will have increased its capacity by 355 transponders.

     He continues, “While some transponders will replace used or damaged satellites, we estimate 179 out of the 355 new transponders launched will be used for brand new operations. These will boost Eutelsat’s capacity by an estimated 27 percent in all of its main markets, i.e. Europe, the Middle-East, Africa and Central Asia, where demand for Ku-band is forecast to grow at compound average growth rates ranging from 3.4 percent (Western Europe) to 11.4 percent (Sub-Saharan Africa). Eutelsat thus looks very well positioned to benefit from structurally growing demand, both in developed and in emerging markets.”

     Eutelsat saw impressive revenue growth across all of its major segments through the end of March. Interestingly, in its multi-usage segment, it saw revenues increase by almost 30 percent compared with the same three months last year. This was fuelled by stronger than expected demand from the government sector.

     Revenues from video applications, which represent the core of Eutelsat’s business, grew by a shade under 5 percent through March. Its results were issued May. 10.

     Rossi described Eutelsat’s latest set of results as “strong.” He says, “Eutelsat reported 10 percent revenue growth in Q3, ahead of Morgan Stanley estimates and consensus of +7.4 percent. 2011 revenue guidance was raised from above 1.12 billion euros ($1.58 billion) to above 1.16 billion euros ($1.64 billion) driven by (i) strong momentum in all of Eutelsat’s markets, (ii) strong growth in multi-usage, especially boosted by government activity in Q3, and (iii) an outstanding 90 percent fill rate as Eutelsat’s fleet was able to respond rapidly to incremental demand.”

     SES also issued its latest results last week. The operator reported revenues through March of 428.4 million euros ($604.49 million), an increase of just above 4 percent compared with the same stage last year. Operating profits were up, close to 7 percent, and reached 206.3 million euros ($291.10 million). Eric Beaudet, a satellite equity analyst at Natixis Securities, said in a research note that the results were “bang in-line with expectations,” but added, “However, the mix was a little disappointing as revenues in the infrastructure division, which offers the most visibility and highest margins, came out lower than expected (+2.5 percent year-on-year). All in all, demand for satellite capacity remains robust, as reflected in the new contracts signed by SES over the quarter with TIBA, AxeSat, Sky Deutschland, etc.”

     Beaudet remains cautious on the stock in the near-term. “We are opting to remain at neutral on the stock for the following reasons: 1) weak growth expected in 2011 (3.3 percent estimate vs. 11.8 percent estimate for Eutelsat); 2) no potential for upward revisions to the consensus (123 of the 146 transponders scheduled for launch this year are to be launched in H2); and 3) a 10-15 million euros ($14.11 million – $21.17 million) restructuring charge aimed at simplifying the group’s structure will take a toll on group EBITDA, making 2011 a transition year for SES.”

     Rossi also believes the company has a “stable outlook.” He said in a research note, “SES expects recurring sales growth to be consistently around 3 percent in Q2, Q3 and Q4. The launch schedule stays largely unchanged. Only SES-4 is now expected to be launched in 4Q11 vs. 3Q11 previously. This should not impact 2012 revenue. Only the launch of fully-contracted Quetzsat in Q3 is crucial to 2011 revenue growth. Demand for capacity is strong in Germany, suggesting that the 33 transponders still used for analog should be rapidly rebooked post switch-off (April 2012). Finally, SES intends to save 10-15 million euros of costs in 2012 and up to 20-25 million euros ($28.22 million – $35.28 million) in the long-run thanks to the implementation of a new management structure. A one-off cost of around 10 million euros ($14.11 million) will be incurred in 2010. This underpins our forecast of 76 percent margins by 2014 estimate.”

     Rossi is also optimistic that O3b Networks could turn out to be a sensible investment for SES. “We view SES’ investment in O3b Networks as a potentially highly attractive source of future value creation. We do not believe the shares are currently pricing in any value for O3b since it is not due to launch initial satellites before 2013. However, we have constructed an initial model which indicates potential EV of $4 billion for O3b, representing a potential 3.0 euros ($4.23) on top of the SES share price,” he says.