No profit warning, but warning signs over video continue,” the Bank writes in its Fixed Satellite Services industry update.  

After 3 profit warnings/guidance cuts in the past 6months, 3Q reporting from the satellite groups has seen no major misses. Good news? Far from it. In a period without major launches, we are in a good position to judge underlying growth for the industry. The results reinforce our concerns over slowing growth. None of the Big 3 grew revenue ex currency and termination fees. The core Video income stream, where broken out, was flat or down, in spite of continued HD penetration and EM growth.

SES is performing best currently, but most exposed by geography/client and remains our SELL, ETL stays HOLD. TP E21/E22 for SES/ETL (were E19/E19.5) offer 23%/27% downside.

The big picture; Video growth will slow

Our concern is not that TV platforms will abandon satellite altogether. Satellite’s cost advantage over DSL will remain for a long time. But rather linear TV channel launches will slow on satellite as more investment is directed to on-demand/OTT, while compression and time-shifted channel closures will more than offset incremental UHD demand. Just look at 3Q reporting from the major content producers. Time Warner (HBO, CNN, Warner Bros films) cut 2016 EPS guidance 14% mainly on re-direction of spend into content for “broadband delivered initiatives”. TW is ahead of the curve, more will follow.

Video pressures already visible in satellite 3Q reporting, but will worsen

Only ETL and Intelsat report Video/Media separately and reported -2%/flat in CY3Q. Intelsat cited continuing compression pressures, as well and delayed contracts in their Media business; “Our Media business is falling short of our original goals”. On compression, the company has flagged N.American platforms rationalizing demand through the MPEG-2 to MPEG-4 & DVBS-2 switch-off. This is a process which is only just starting in Europe as the leading operators achieve 100% MPEG-4 box swap-out. ETL have acknowledged this could impair Video demand, but argue their key clients in Poland, Italy, Greece are less advanced in box swap-out and so this will be slower to play out.

This is not reflected in consensus or premium-growth multiple

Video is 70% of revs, more of earnings and W.Europe the majority. If 50-60% of earnings (and the long-term contracts, so prized by investors) slows, this brings major de-rating risk. Defensive sectors with no or slow earnings growth (European professional publishers, utilities, telcos) trade at 6-9% FCFE yield and 14-16x CY16 P/E. SES and ETL at 4/5% on normalized CAPEX and 18-19x P/E are at the same multiples as defensive sectors with strong growth (household care, beverages). We take 6.5% for TP (was 7.0%), implying ~15x P/E), giving 23%/27% downside.

SES sound more upbeat? Why the SELL rating?

SES were more upbeat on Video, stating they still saw growth; suggesting outperformance vs peers. So why SELL? SES’s geographic exposure is more weighted to N.European operators where we expect MPEG-2 switch-off, timeshifted closures and OTT pressures to arrive soonest. SES is 65% revenue exposed to W.Europe and US (by billing address) vs 40% for ETL post SATMEX. We are cutting EPS 10-17% for SES on higher losses for O3B vs upgrading 8-15% for ETL (albeit ETL mainly on interest). Upside risks for SES: Video revs, Gov’t outsourcing, cash returns, O3B.

No guidance cuts, but no beats

ETL 3Q revenues saw a 2% beat vs consensus, but this came of Other/nonrecurring on early termination fees from a Government distributor who failed to fill demand and was forced to cancel. The contract was multiyear, leading to our downgrades to FY16 and onwards. Guidance was unchanged at 2-3% FY16 and 4-5% FY17 for revenues (DB +1.9%/+4.4%) and EBITDA margin above 76.5% (DB 77.2%/77.5%). SES results were in-line set of results to EBIT level with a miss below this from higher associate losses (O3B) and higher interest costs.