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Analysts Remain Bullish About SES Global

By | August 9, 2007

      When SES Global this week announced its half-year results to the end of June, the company’s status was greeted positively by analysts who believe that the stock represents an attractive pick in the satellite sector.

      On Aug. 6, SES reported overall revenues of 789.1 million euros ($1.09 billion), an increase of 11 percent compared to the same period last year. The operator also saw half-year operating profits reach 298.8 million euros ($412.0 million), an increase of seven percent compared to last year.

      However, net profits for the six months to the end of June were 207.8 million euros ($286.5 million), down almost 4 percent compared to last year. SES Global cited two reasons for the fall: There was a one-off NSS-8 launch failure charge of 11.6 million euros ($16.0 million) after tax, and the 2006 net profits included a gain of 15.4 million euros ($21.2 million) related to the SES Ré disposal.

      Despite the slipping profits, analysts were positive. Eric Beaudet, a satellite equity analyst at Natixis Securities, noted that “the underlying business of SES is doing very good, even with a weaker dollar. Guidance was raised. Expectations are the same. I am positive on the stock and I like SES’s exposure to all continents. Overall, it is a nice story. Their margins are still improving and they said there are still some more synergies and improvements to come from the New Skies acquisition, so all in all the results were positive.”

      Another satellite equity analyst, Richard Menzies-Gow of Dresdner Kleinwort, added that he “thought generally it was a good set of figures. I think consensus-wise [that] they came in slightly low on sales, but higher on [earnings before interest, taxes, depreciation and amortization]. They were perceived as being slightly ahead of consensus.”

      While Beaudet remained positive about the stock, he believed that one of the major challenges facing SES next year will be the performance of its recently launched IPTV initiative in the United States, IP Prime.

      "I am looking forward to seeing some more numbers on that and how fast it picks up,” he explained. “I know they have a couple of customers already. But for it to become a profitable business, they have to find some new customers and gain some traction on that. I think over the next six [to] 12 months, IP Prime will be one of the things we will look at. I think it is a great model, as long as they get some clients. It is a fixed-cost business. Every new customer they add will now be pure margin.”

      While impressed with SES’s results, analyst Mathieu Robilliard of Exane BNP Paribas believed that the operator still could improve its cost efficiencies. He observed that “SES’s profitability numbers show a good effort in terms of cost-cutting. That is certainly an area where SES can and should improve further, notably when you compare it with Eutelsat, but it is going in the right direction.”

      Nevertheless, Robilliard believed that SES’s great rival Eutelsat has recently performed better.

      "Fundamentally, the results of Eutelsat were stronger,” he said. “They have done very well on margins and had high-quality growth. However, Eutelsat is entering a year with low growth as capacity utilization is high and there is little new capacity coming to market. Only by 2009 will there be a return to a higher growth path. For SES, short-term prospects are more attractive with more growth expected in the year ahead. Also, if SES continues to work on its cost structure, we could have further good news in terms of margin.”

      On August 3, satellite equity analyst Sarah Simon of Morgan Stanley issued a new report, “Media & Internet: The Strengths of Satellite” which specifically considered the prospects of both SES and Eutelsat. In it, Simon believes both stocks represent attractive opportunities for investors.

      Simon wrote that “we believe that satellite stocks continue to represent an excellent opportunity for a number of reasons: Their business is based on long-term (10- to 15-year) contracts, and is thus highly visible. With costs primarily related to the (known) number of satellites in orbit, this makes for a high degree of predictability in base case [earnings before interest, taxes, depreciation and amortization]. Any surprises should be positive. Investment requirements are also known, since the minimum life of a satellite is known upon launch. Any shortfall due to technical failure would be covered by insurance, and in fact satellites are tending to outlive their planned lifespan by a number of years.

      She continued that “while a large chunk of the media sector is struggling with the headwinds of fragmentation and the Internet, these are the drivers of satellite growth. SES and Eutelsat benefit each time a new channel launches, as video moves to the Internet, and as new technology such as HD demand more and more bandwidth. These stocks are relatively conservatively financed, even if net debt/[and earnings before interest, taxes, depreciation and amortization] is higher than the sector average at circa 3.5 times. Current year fiscal interest cover is 7.9 times for SES and 6.2 times for Eutelsat. Moreover, both have fixed their borrowings well into the next decade.”

      Simon remained bullish on the SES story and believed that recent capacity deals in Europe supported such optimism.

      "The company has made a number of announcements regarding new capacity sales recently, in particular for New Skies, which covers the emerging markets,” she observed. “We also note that (the recent) announcement that ARD and ZDF, the German public broadcasters, have taken two additional transponders worth of capacity should finally knock on the head the idea that SES will struggle to sell capacity at 19.2 degrees East when Germany finally switches off analog.”

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