SES/Intelsat - Hold your breath

All,

Please find our updated analysis on SES here. 

Following recent speculation on European defence spending finding its way into European satellite operators, SES’ bonds and hybrids have strongly appreciated, leaving us to wonder just how long the market is willing to hold its breath. Canada only needs a short-term fix before Telesat is up, Starlink is too big in the Ukraine to be replaced and Italy have never made a quick decision. We are not convinced these contracts will be signed before the end of round-1 C-Band compensation reveals a mere 50% Gross Margin for the combined business.

Investment Considerations:

- We are looking at the hybrids and the long end of the bonds from a short perspective, but not taking a position yet for lack of a trigger in the short term. The bonds have appreciated by 10 points, mostly on speculation that European defence spending would bail them out. SES will be a slow-moving grind downwards, but Q125 is unlikely to deliver significant incremental news to drop the bond price. Moreover, these instruments have significant duration and if Europe reacts to current geopolitics by dropping rates, then a short would suffer. 

- The nearest catalyst would either be a government announcement to stay with Starlink, or H1 reporting, revealing the low underlying margins in the absence of more C-Band compensation.

Fundamental Development:

- In Q424, all segments except SES Video performed worse than we expected. We have adjusted the models accordingly. 

- We have significantly increased our forecast for the Government segment. We are not sure growth will be as high as market sentiment implies, but there should be robust growth in defence. 

- Operating Expenses in H2 were again higher than in H1 in a similar pattern to 2023. We are wondering if we are overlooking a trend here, but for now have resumed the forecast for both half-years per H1 level. 

Miscellaneous:

- Management are talking up the value of their round-2 C-Band compensation, as they should be.

- SES still have a €472m insurance claim outstanding for the first four mPower satellites that developed health issues shortly after delivery. Boeing has not yet accepted the claim and the asset remains contingent.

- Iris-2 - the company has received a first payment, but detail still needs to be worked out. Little information so far. 

- The Intelsat transaction remains on track and the CMA are apparently only asking routine questions. 

Here to discuss this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk