Riding a Low-Flying Rocket

Overcapacity and competition are hurting Eutelsat and SES.

Shooting rockets into space inspires starry-eyed dreams in many people. Just look at the fervor inspired by every launch attempted by Elon Musk's SpaceX.

Perhaps that's why recent troubles at Europe's three publicly traded satellite makers have caught so many investors on the hop.

Fall to Earth

Europe's satellite companies are on a bad run

Source: Bloomberg

Eutelsat, SES, and Inmarsat design communications satellites and sell their capacity to television, telecoms, and transportation companies. All are suffering as overcapacity and price competition feed a decline in revenue -- and new high-throughput satellites coming online are set to add even more capacity to the system.

Don't expect a quick recovery. Since Eutelsat issued a profit warning in May, the French company's shares have slumped 35 percent. SES is down 20 percent. Inmarsat is down a mere 3 percent, partly because it relies more on selling connections to the maritime industry than television broadcasters.

Investors' old view of satellites as a defensive industry with revenue growth in the mid-single digits and generous dividend payouts has been painfully reset.

Generous Reward

SES and Eutelsat's dividend payout ratios have traditionally been quite high

Source: Bloomberg

Fat profit margins of as much as 70 percent to 80 percent are already starting to shrink: Eutelsat's Ebitda margin fell to 76.2 percent in the fiscal year through June from 76.7 percent a year earlier. That figure is set to drop to 75.4 percent in the coming fiscal year, according to Bloomberg data.

Space Riches

Satellite companies have historically enjoyed fat margins

Source: Bloomberg

Investors now have to decide whether the satellite companies' various bets that providing broadband to Africa and Latin America, wifi on planes and and high-definition television services known as 4K will stimulate demand.

There is reason to be skeptical: consumers haven't flocked to 4K televisions, and few shows are even broadcast in the technology. On land, telecommunications operators are upgrading to faster fiber broadband, an increasingly popular way of carrying TV signals.

Eutelsat bet heavily on Latin America with its 2014 acquisition of Satmex only to encounter much lower demand than it expected. The company now expects revenue to decline between 1 percent and 3 percent in the coming fiscal year. A return to "slight" growth is promised in three years' time.

Until then, new CEO Rodolphe Belmer is focusing on defending the group's cash flow by cutting capital expenditure and finding a buyer for Eutelsat's 34 percent stake in Spain's Hispasat.

But there's a hitch. Abertis, Eutelsat's partner in the venture, has disputed the French company's claimed option to exit this summer -- so there is some uncertainty over the sale. As much as 500 million euros is at stake for Eutelsat, according to RBC analyst Jonathan Dann.

The cash would help Belmer deliver on his promised stable to progressive dividend. Until recently, Eutelsat had been forced to pay part of its dividend in stock after taking on more debt to fund the Satmex deal.

SES has adopted a different approach to coping with fallow times. In May, it agreed to buy out minorities in 03b, which is building a global network of high-capacity satellites that will beam high-speed Internet to remote locations. In May, SES held a 909 million-euro fundraising, helping it to protect its dividend.

The dividends at all three satellite companies look covered by earnings for now and the yields -- as much as 6.7 percent in SES's case -- may look attractive to investors in a world of low interest rates. The key will be making sure the companies' dividend pledges don't fall to earth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Leila Abboud in Paris at labboud@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

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