07 February 2014 Global Equity Research
Global Satellite
Connections Series
Industry revenue outlook to improve over 2014
Figure 1: Global Satellite performance vs. MSCI Telcos Europe Index
The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Source: Satellite companies (SES, Eutelsat, Inmarsat and Intelsat), constant FX
Research Analysts ■ Global satellite industry revenue outlook to improve over 2014. 2013 Paul Sidney proved a very challenging year for the industry with downward revenue 44 20 7888 6015 pressure from: 1) US DoD spending cuts; 2) launch delays (funding [email protected] issues/failures); and 3) Africa/Middle East oversupply. As a result, over 2013, Joseph Mastrogiovanni most global operators rebased 2014-16 revenue guidance. Despite this, we 212 325 3757 expect US budgetary pressure to ease over 2014 while we continue to [email protected] expect overall global capacity demand to exceed global supply from 2015. Henrik Herbst 212 325 3149 ■ While launch delays remain an industry hazard, we expect US Defence [email protected] budgetary pressure to reduce following US Congress approval of a two- Francisco Sanches year 'mini-deal', which will see US Defence spending rise slightly yoy in 2014 44 20 7888 6834 [email protected] instead of a further ~$20bn decline previously agreed under the sequester. Bradley Clibborn ■ DTH compression ratio concerns overdone. We remain confident that 61 2 8205 4465 DTH capacity freed up from both higher compression techniques and a [email protected] reduction in time-shifted SD broadcasting will be redeployed to boosting SD picture quality and increasing HD/4k channels as the cost of 4k TV sets falls. ■ Africa/Middle East oversupply now the biggest industry headwind over the next three years. With several developing world governments launching new national capacity, we currently have low visibility on: 1) how quickly demand will soak up the current oversupply; and 2) whether national government satellite launches will reduce the need for commercial capacity. Eutelsat remains the most exposed operator to this issue. ■ We reiterate our positive view on Inmarsat growth, despite cutting EBITDA forecasts 5-7% (GX costs). Among the global FSS players, we prefer SES (Outperform) to both Eutelsat (reinstating coverage with a Neutral rating) and Intelsat (Neutral). We rate NewSat Outperform.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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07 February 2014 Table of contents
Key charts 3 Global satellite industry trading multiples 4 Summary of global satellite stock views 5 Global Satellite—Industry trends for 2014 6 1. US Defence budget cuts—over the worst 6 2. 4k (Ultra-HD) to offset compression ratio technology 8 3. Shutdown of SD channels to partially offset 4k 12 4. Oversupply in Africa and Middle East regions to continue 12 5. High-Throughput constellations to drive accelerating data demand 14 6. Terrestrial Fibre and mobile build-out not a near-term threat 17 7. Global satellite industry consolidation to continue 19 8. Satellite launch delays remain an 'industry hazard' 21 FSS supply/demand model—Extended Europe 24 Video and data applications—only small changes to forecasts 25 Supply—2013-15 update for new launches and delays 28 Global demand and supply model 29 Satellite operators' exposure to key global industry themes 31 Intelsat S.A. (I): Reiterate Neutral rating and TP $25 34 Inmarsat PLC (ISA.L): Global VSAT market expected to be worth $3bn by 2020 38 Eutelsat Communications (ETL.PA): Reinstate coverage with Neutral 46 SES (SESFd.PA): Preferred Global FSS play 50 NewSat Limited (NWT.AX / NWT AU): Reiterate Outperform rating 54 Appendix 1—PEERs maps 63 Appendix 2—Credit Suisse HOLT® 66
Global Satellite 2 07 February 2014 Key charts
Figure 2: Extended Europe Transponder demand vs. Figure 3: Global Transponder demand vs. supply (Jan 2014) supply (Jan 2014) 600 800
700 500 600 400 500
300 400
band band 36Mz transponders 300 200 -
trpx(36MHz equivalent) 200 and and Ku
100 - C 100
0 0 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Incremental capacity Incremental demand Incremental supply Incremental demand
Source: Company data, Lyngsat, Credit Suisse estimates Source: Company data, Lyngsat, Credit Suisse estimates
Figure 4: US DoD budget under different scenarios Figure 5: HD vs. Ultra HD channels growth in the for the first 7-year period
580 12.0%
560 10.0%
540 8.0%
520 6.0%
500 4.0%
480 2.0%
460 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 0.0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Base Budget Under Full Sequester Base Budget Under Mini-Deal (CS est) FY'14 FYDP (no Sequester) HD channel penetration % Ultra HD channel penetration %
Source: CS US Aerospace & Defence Research Team (US Source: Source: Company data, Credit Suisse estimates NOTE: Year Aerospace & Defense 2014 Outlook, dated 19 December 2013) 1=2005 for HD and Year 1=2013 for Ultra HD
Figure 6: Average selling prices of 4K televisions (NPD Figure 7: HD vs. Ultra HD channel penetration from launch DisplaySearch data published in The Wall Street Journal) % US$, unless otherwise stated $20,000 $18,667
$16,000
$12,000 $7,851 $8,000 $4,503 $4,000 $1,986 $1,120 $973 $0 World-wide China North America 2012 Estimate 2014
Source: NPD DisplaySearch, The Wall Street Journal Source: IHS
Global Satellite 3
Satellite Global Global satellite industry trading multiples
Figure 8: Global satellite industry trading multiples
Local currency
Source: Company data, Credit Suisse estimates
07 February 2014 February 07
4
07 February 2014 Summary of global satellite stock views Global satellite industry revenue outlook to improve over 2014 2013 proved a very challenging year for the industry with downward revenue pressure from: 1) US DoD spending cuts; 2) launch delays (funding issues/failures), and 3) Africa/Middle East oversupply. As a result, over 2013, most global operators rebased 2014-16 revenue guidance. Despite this, we expect US budgetary pressure to ease over 2014 while we continue to expect overall global capacity demand to exceed global supply from 2015. Below, we summarise the individual stock views of the global satellite stocks in the Credit Suisse coverage universe.
■ Inmarsat—(Outperform, TP 800p). We reiterate our Outperform on Inmarsat and target price of 800p as we continue to forecast strong growth for the company boosted from 2015 by Global Xpress. Despite the continued positive growth, we are cutting 2014-17E EBITDA forecasts by 5-7% to reflect; 1) higher GX set-up costs than previously forecast; and 2) the sale of Inmarsat's Retail Energy operations to Rignet. ■ Intelsat—(Neutral, TP $25). We reiterate our Neutral rating and $25 target price on Intelsat. We are not changing our forecasts as we had already factored in continued pressure in the government and point-to-point channel business. We are broadly in line with consensus revenue and EBITDA forecasts for 2013-2015E. ■ SES—(Outperform, TP €27). We reiterate our Outperform and €27 price target on SES. In this report, we make only minor adjustments to our forecasts for SES. We are broadly in line with consensus in the short term, but we are ahead in 2015, reiterating our view that in the longer term, supply of satellite capacity will be exceeded by demand. We, and consensus, are below SES guidance (3-4% revenue growth in 2013 and 4.5% revenue CAGR for 2012-2014), which we believe could be revised downwards due to further launch delays; however, consensus is already below guidance and, to a large extent, already factoring this into estimates. We remain optimistic in the mid-term for SES and see headwinds from satellite delays only affecting short-term numbers. ■ Eutelsat—(Neutral, TP €23). We reinstate coverage of Eutelsat with a Neutral rating and a target price of €23 per share. We see Eutelsat as the most exposed FSS operator to both US DoD spend and oversupply in Africa and we prefer SES among the FSS Satellite operators. We are below consensus for Eutelsat for the first time in over two years. In our view, Eutelsat does not have the required satellite capacity to sustain high single digit revenue growth over the next six months. In July 2013, Eutelsat cut its guidance for revenue growth to above 2.5% in FY June 14 and above 5-6% for the two years ahead. This reflected; 1) uncertainty from US DoD budget cuts which impact multi- usage revenues, and 2) lack of available capacity to sustain high growth in video and data applications. ■ NewSat (Outperform, TP A$0.74). NewSat is an Australian Teleport operator supplying secure satellite data and communications services to government, enterprise and telecoms customers in remote locations, primarily around Australia, PNG and Timor Leste. Services are delivered via NWT's two Australian teleports (Adelaide and Perth) which uplink to 13 third-party geostationary satellites. We have upgraded EBITDA FY15E to FY17E by 3% to 8% to predominantly reflect a lower assumed long term AUD:USD (0.85 from 0.90). Our FY14 Teleport forecasts decline to reflect weaker Teleport sales over the past 12 months.
Global Satellite 5 07 February 2014 Global Satellite—Industry trends for 2014 In this report, we discuss the main global satellite trends that we believe will shape the industry over 2014 and over the next 5-10 years. 1. US Defence budget cuts—over the worst On 9 December 2013, an agreement to raise military and domestic spending over the next two years from sequestered levels (previously in law in the United States) was reached. We believe this agreement will ease pressure on the satellite industry caused by the effect of US Defense budget cuts over 2013. We summarise the potential US Defense budget (in data sourced from our US Aerospace and Defense research team) progression in Figure 9 under three different scenarios:
■ with no sequester;
■ with the full sequester; and
■ under the recently agreed 'mini-deal'. In conclusion, under the 'mini-deal' agreed by Congress, US Defence spending will now increase in 2014 relative to 2013 compared with a decline of around $20bn that would have occurred under the sequester. Our US Aerospace and Defense research team expects the 2014 US Defence budget to rise to $486bn from $482bn in 2013, compared with a 2014 budget of $464bn under the sequester, see Figure 9.
Figure 9: US Defence budget under agreed mini-deal will see spend rising in 2014
580
560
540
520
500
480
460 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Base Budget Under Full Sequester Base Budget Under Mini-Deal (CS est) FY'14 FYDP (no Sequester)
Source: Credit Suisse estimates (Credit Suisse US Aerospace & Defence research team research report— US Aerospace & Defense 2014 Outlook, dated 19 December 2013) We note that after the agreed two-year deal, our US Aerospace and Defense research team prudently assumes the 2016 Defence budget returns to sequester levels. In our April 2013 satellite report (Growing risk from US DoD budget cuts, dated 19 April 2013), we discussed the impact from US DoD cuts for the industry. At that time, we cut demand forecasts in our model to reflect lower demand for military satellite capacity, which resulted in downward revisions to our estimates for both Eutelsat and SES. Previous impacts from US DoD on our covered companies US Defence spending cuts have impacted the satellite stocks by varying degrees over the past 12 months, as we summarise below:
Global Satellite 6 07 February 2014
■ Eutelsat (estimated 9% of revenues from global government services): Typically has two windows for contract renewals with the US DoD each year—one in February/March and the other in September/October. After the February/March 2013 renewal ,Eutelsat stated that its 6-7% three-year revenue guidance (FYJun12- Jun15E) could be negatively impacted by “up to 1pp” implying a cut to around 5- 6%. Eutelsat stated the September/October 2013 renewal was more in line with its own expectations with 90% of the contracts with the US DoD successfully renegotiated as part of this campaign, compared with only 80% in the February/March 2013 renewal.
■ SES (estimated 12% of revenues from global government/military services): US government revenues increased year on year for SES in Q313 with SES now expecting flat yoy US government/military revenue for FY13 as a whole. SES believes demand for satellite capacity from US governmental agencies other than US DoD will grow over the next 2-3 years. The recent decision by the US Air Force to extend its hosted payload (on SES-2) missile warning mission is another datapoint suggesting to us that pressure from US DoD budget cuts could ease over 2014. Intelsat (19% of revenues from government services): Intelsat recently reduced its 2013 revenue guidance partly due to a worsening in its near-term outlook for government revenues. RFP issuance and awards remains slower than usual and customers continue to consolidate existing capacity. We forecast a 4% decline in government revenues over 2014 (small improvement from -7% in 2013) and make no changes to our Intelsat revenue forecasts in this report.
■ Inmarsat (estimated 30-35% of revenues from global government services). Inmarsat continues to see pressure in its US government retail unit (part of its low margin Inmarsat Solutions division) as a result of "on-going spending controls" and added that it "continues to expect a reduction in contracting opportunities as further programmes are cancelled, de-scoped or delayed". Inmarsat Solutions profitability did not deteriorate further in Q313 although we believe Q3 was boosted by short-term government contracts that are potentially not sustainable in the longer term. Despite this, Inmarsat continues to see little impact on its higher-margin MSS traffic business from US DoD demand but remains cautious going into 2014. US DoD also moving towards longer-term contracts and more hosted payloads Commercial satellite service providers (including Eutelsat, Intelsat and SES) have been working closely with the US DoD to improve provisioning practises for some time. The budget cuts over 2013 have added urgency to these efforts. In December 2013, we observed further evidence the US DoD was increasing its co-operation with commercial satellite operators in order to achieve this. The FY 2014 National Defense Authorization Act, signed into law by President Obama on 27 December 2013, requires the US DoD to provide Congress briefings on strategies for multi-year procurements of commercial satellite services within 90 days from the passing and signature of the bill. As a result, we believe the US DoD could move towards signing longer-term contracts rather than the typical current one-year contracts (with options to extend year by year). Furthermore, the US DoD has been prompted by Congress to analyse hosted payload opportunities. Longer-term contracts and hosted payloads have previously been promoted by the commercial satellite service providers. Intelsat has welcomed the move by the US government in a public statement. We agree the move by the US government is positive for both parties, buying satellite capacity in the spot market on year-by-year contracts are generally the most expensive. So buying on longer-term contracts could potentially reduce the cost per capacity for the US DoD while at the same time offering more visibility and planning potential for the commercial satellite service providers.
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While the potential change in procurement practice from the US DoD might not have a material impact on 2014, we do believe it can have medium-term positive impacts on respective commercial satellite operators which supply government business. Conclusion—Pressure from US DoD cuts to ease over 2014 and 2015 In conclusion, we see the agreement to raise US defence spending in 2014 as part of the 'mini-deal' and the US government moving towards more efficient procurement methods as creating less pressure in 2014 than we saw in 2013. With the US DoD budget also slated to rise slightly in 2015 and 2016, we expect the negative impact observed over 2013 will not be repeated over 2014-2016. 2. 4k (Ultra-HD) to offset compression ratio technology Over the past 12-18 months, we have seen demand expectations for 3DTV among broadcasters and satellite operators fall to very low levels as 3DTV demand so far has been lacklustre, due to the need for glasses to watch 3DTV and the cost of filming TV content in 3D. At the SATELLITE2013® conference in March 2013, the focus for next generation DTH viewing had shifted much more towards 4k (or Ultra High-Definition). What is 4k? 4k is a much higher resolution TV picture than HDTV that requires higher bandwidth to transmit. There are two future evolutions of Ultra HDTV currently under development:
■ 4k with a 3840x2160 (8.3 megapixels) resolution; and
■ 8k 7680x4320 (33.2 megapixels) resolution, 4k and 8k represent a doubling and quadrupling of the resolution of standard HDTV, 1920x1080 (2.1 megapixels). Over the next 10 years, we are likely to see the launch of many 4k channels (driven initially by Sports and Movies as was the case with HD, in our view) with 4k TV sets already on sale in the US, Asia and Western Europe. Over the next 10-20 years, incremental demand will be boosted by a further move to 8k. With higher resolution, the required transmission bandwidth will rise. For example, transmitting 4k in HEVC compression, it will be possible to host only two channels per transponder (36MHz) compared with the current 5-7 HDTV channels per transponder (using MPEG-4 encoding) or 10-20 SD channels per transponder. We set out the comparable channels per transponder by format and compression type in Figure 10.
Figure 10:Channels per transponders falling for the last decades
Source: Eutelsat
Global Satellite 8 07 February 2014
4k to become mass market within five years At SATELLITE2013®, FSS operators had differing views on when the industry will generate meaningful revenues from 4k. Eutelsat believes the 2016 Olympics will see sales of more affordable 4k TV sets increase and, therefore, provide the first major catalyst for broadcasters to begin broadcasting in 4k. SES was a little more optimistic, suggesting we could see 4k channels offered by 2015 and adding that adoption of 4k could be faster than the move from SD to HD as consumers were already aware of the quality improvements achieved with higher definition transmissions and could be quicker to buy 4k TV sets and more willing to pay a premium for 4k content. Intelsat stated it only expects material revenue from Ultra HD in around five years and that in emerging markets, demand for HD would continue to grow. With the Football World Cup in 2014 and the Olympic Games in 2016, there is scope for broadcasters to begin transmitting mass market sports events in 4k or at least trialling the technology, in our view. Cost of 4k TV sets to fall materially over 2014-15 The cost of 4K televisions is expected to fall materially over 2014-15. According to a recent article in The Wall Street Journal (which sourced data from NPD DisplaySearch) the price of 4K TV sets is expected to fall materially over the next few years, see Figure 11. Ultra HD content now being created Netflix recently announced plans to stream the second season of "The House of Cards" in 4k, starting in 2014 while Amazon has also indicated that it will invest in TV programming in 2014 to be filmed in the 4k format. Comcast and Samsung recently announced a partnership to deliver 4k content to Samsung TV sets in 2014. The content will be available via the internet and users will be able to stream. Telcos are also anticipating this move. BT announced plans to start trialling 4K this year through its fibre network. However, this would have to be in small scale as it would require significant investment to mass-market this content. Ironically, we view this as positive for the satellite industry as OTT could boost demand for 4k content, requiring satellite broadcasters (e.g. BSkyB in the UK) to move more quickly to transmit in 4k.
Figure 11: Average selling prices of 4k televisions to drop significantly over 2014 according to NPD DisplaySearch data published in The Wall Street Journal $20,000 $18,667
$16,000
$12,000 $7,851 $8,000 $4,503 $4,000 $1,986 $1,120 $973 $0 World-wide China North America 2012 Estimate 2014
Source: NPD DisplaySearch, The Wall Street Journal
Global Satellite 9 07 February 2014
4k TV set availability remains low. Sony (Figure 12) and Samsung have launched 4k sets, but prices are still high (Sony’s 55” Ultra HD set retails for $3,000) although already cheaper than the initially launch price of $5,000 and expected to fall materially over the next two years as discussed above.
Figure 12: Sony 4k sets already available
Source: Sony website
According to data from the IHS, from 2015-16, an acceleration in Ultra HD growth is expected, as TV sets become more affordable and subscribers start engaging with UHDTV content (Figure 13). Europe and North America are likely to become early adopters.
Figure 13: Estimated Ultra HD TV Household penetration by region (2012-2025)
Source: IHS Our forecasts for Ultra HD adoption growth are substantially below those seen in HD take- up (Figure 14), in terms of penetration of total channels, when it was first launched.
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Figure 14: HD vs. Ultra HD channel growth to year 8 from launch (Extended Europe) 12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
HD channel penetration % Ultra HD channel penetration %
Source: Company data, Credit Suisse estimates, NOTE: Year 1=2005 for HD and Year 1=2013 for Ultra HD We forecast 80 4k channels by the end of 2015 in Extended Europe (Figure 15), growing to 190 by the end of 2017E. From the launch of HD in the late 1990s/early 2000s, the number of HDTV channels grew to 548 in 2010 within the same time, and had reached 797 channels by the end of 2011. The adoption rate of 4k could, in our view, be faster than the roll-out of HD once we have had a broader launch in 2015-16 given:
■ Customers are now more used to paying for higher resolution programming due to the HD experience which could speed up the adoption among consumers of 4k—this in turn should further drive the amount of content produced in 4k.
■ The replacement cycle of TV sets is now around six years, considerably shorter than the ~10-year replacement cycle when HD was launched in the early 2000s—as a result, we believe the move to adopting 4k TV sets could be faster than the move from SD sets to HD sets. HD channel growth to continue in Extended Europe The continued development of higher resolution video supports greater demand for satellite capacity, in our view. We expect the total number of HD channels to continue to increase at an average annual rate of 20% for the next three years in Extended Europe. Longer term, we believe 4k will become an increasingly material driver of demand for DTH TV capacity. Furthermore, we believe the growing demand for higher resolution channels will offset pressure on satellite capacity from improved compression technologies. As shown in Figure 10, compression ratios have steadily improved over the past few years, with each improvement allowing a greater number of channels per transponder to be broadcast. We note that excess capacity has been redirected towards HD programming. Conclusion—We expect 200 4k channels in Extended Europe by 2018E We do not expect 4k channel demand to materially impact our Extended Europe demand model until 2016 but 4k channel growth will accelerate over time. Our forecasts for 4k channels in Extended Europe are shown below in Figure 15. SES estimated there would be ~200 4k channels globally by 2020 at its recent investor day vs. the 420 4k channels in Extended Europe only.
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Figure 15: Credit Suisse estimates for HD and Ultra HD TV channels in Extended Europe Extended Europe HD and Ultra HD 2012* 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E TV channels forecast HD channels extended Europe 1,184 1,480 1,806 2,167 2,600 3,120 3,682 4,344 5,039 growth y/y 48.6% 25.0% 22.0% 20.0% 20.0% 20.0% 18.0% 18.0% 16.0% Ultra HD (4k) 0 5 35 80 120 190 200 300 420 growth y/y 600.0% 128.6% 50.0% 58.3% 5.3% 50.0% 40.0% Source: Company data, Credit Suisse estimates. *Credit Suisse research assumptions, based on Eutelsat and SES published information 3. Shutdown of SD channels to partially offset 4k The downside of new technologies such as HDTV and 4k is that the number of SD channels likely reduces over time. When a new technology is launched, content is typically broadcast over both SD and HD but, as more viewing shifts to the higher resolution content, the need to also show this content in SD reduces over time and, potentially, is switched off. We have seen evidence of this happening in Germany with the switch-off of the analogue satellite signal taking €108m out of SES revenues in 2012. With HDTV potentially becoming the new standard over time, the need to continue broadcasting the same content in both HD and SD reduces. Over 2013-14, we do not see a material risk of SD channels being shut down in Western Europe with SES stating that freed up SD capacity is being quickly redeployed to improve the picture quality of other, more popular, SD channels (e.g. the popular terrestrial channels in the UK broadcast by BSkyB). We believe a shutdown of the SD channels will be less negative than the shutdown of the analogue signal as, for analogue TV, one transponder could only provide 1-2 channels while you can fit 10-20 SD channels (depending on compression) on one transponder and the new technology demands more transponder capacity per channel. We forecast SDTV channel growth in Extended Europe to continue to slow from an estimated 2.5% in 2012 to just 1% in 2015E. We still expect low growth in the overall number of SDTV channels given that, although we should see a decline in Western Europe, SD channel growth should continue in less developed TV markets such as Africa, the Middle East and CEE, where HDTV set penetration is still very low compared with Western Europe. Please see our detailed Extended Europe TV model later in this report for our detailed TV channel forecasts. 4. Oversupply in Africa and Middle East regions to continue Oversupply of satellite capacity in Africa and the Middle East regions was highlighted by several operators over 2012-13 as one of the main headwinds to growth over this period. Both Eutelsat and Intelsat recently stated that this was still a drag on growth in their respective Q113 and Q313 results. In our view, SES is less affected by this trend as it has been relatively successful in partially offsetting overcapacity with new contracts gained in other regions. There is hope among industry players that this oversupply is only temporary but, with so much capacity set to be launched by national governments over 2014-15 (particularly in Africa), this means that we have little visibility on when this oversupply will end and pricing can stabilise. As set out in Figure 16, Eutelsat remains substantially more exposed to North Africa and Middle East.
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Figure 16: Extended Europe overview Regions pops Internet users as % TV market Key TV platforms ETL SES of total pops exposure* exposure* Europe 500m 74% ~60% pay-tv penetration in Sky UK, Sky Italy, Sky 86.8% 64.7% W Europe and 70% TV set Germany, Cyfra+ (Poland), penetration of homes in CEE UPC, Tring (Croatia) Central Asia (incl Russia) 210m 50% ~35% pay-TV penetration Tricolor (Russia), Digiturk 30.0% 29.4% (Turkey), Viasat Ukraine Middle East & North Africa 600m 29% in Arab States, 56% of TV households watch Al Jazeera, OSN, Multichoice 90.0% 26.5% 13% in Africa FTA DTH signals Africa Sub Saharan Africa 900m 13% in Africa ~20% TV penetration Multichoice Africa 20.0% 17.6% Source: Company data, Credit Suisse estimates, *Note ETL and SES exposure is defined as % of satellites covering the region. The total is >100% as a satellite can cover more than 1 region Governments worldwide launching their own satellite programs According to recent press reports, many governments in Africa and other developing satellite nations are opting to build and operator their own satellites which could further increase oversupply in these regions: ■ On 30 October, Bloomberg announced that the Angolan government had announced a $300m project for a Russian-built satellite scheduled for 2017, as part of new investment plans to improve telecommunications in the country and diversify away from oil. The article also mentioned that Angola was looking to add fibre-optic cable to increase mobile-phone coverage in the country; ■ The Nigerian government launched the NigComSat 1R satellite in 2011 and has two additional satellites (NigComSat 2 and 3) scheduled for launch in 2014 and 2015 to support the country with cheaper connectivity; ■ The Congostar 1 satellite, scheduled for launch in 2015, is another example of an African government (Congo) ordering its own satellite. The satellite is to be launched with a Chinese launch vehicle and aimed at the 60E orbital slot; ■ The Belarus government has ordered a satellite, scheduled for launch in 2015, Belintersat 1 to be positioned at the 51.5E orbital slot and we expect mainly to support the country with connectivity in rural areas. The satellite is to be launched by a Chinese rocket, and we believe the Chinese could also have helped with the financing of the satellite; ■ The Laos government has also recently announced a new satellite (Laosat 1, 128.5E) to be launched with a Chinese rocket. In line with other announced government satellite programmes, we believe the Laosat 1 satellite is mainly aimed at increasing connectivity in the country; and ■ The Tupak Katari Sat 1 satellite ordered by the Bolivian government is yet another example of government satellites launched with a Chinese launch vehicle. LatAm growth, however, remains strong SES-6 was launched in June 2013. SES intends to tap satellite demand in Latin America, having signed a major multi-year transponder capacity agreement for the majority of the Ku-band capacity available on SES-6 with Oi, a major Brazilian telecom operator. With this contract, SES has secured a partnership with a growing operator in the DTH TV in Brazil, which was previously supplied with capacity from Hispasat, where Eutelsat owns a minority stake of 33.6%. This contract, along with a series of other contracts in Asia and Africa, has allowed SES to partially offset the revenue risk from slowing growth in the African region. Eutelsat has acquired Satmex to achieve scale in the Latam region. Satmex generated US$112m in FSS revenues in 2012, 31% of which were from Latam/Caribbean (ex-Mexico) and 37% from Mexico although Satmex does not currently supply capacity to Brazil. Eutelsat's capacity in Latam will increase further with the expected launch of Satmex-9 in 2015 and with Eutelsat 65WestA, the latter planned for launch in 2016.
Global Satellite 13 07 February 2014
Conclusion—Africa and Middle East oversupply the key industry negative for 2014- 16 and beyond We expect oversupply in Africa and the Middle East to remain the key headwind for global industry revenues over the next three years. With several governments launching new capacity, it is unclear currently 1) how quickly demand will soak up the current oversupply; and 2) whether government satellite launches reduce the need for commercial capacity demand. As set out in Figure 16, Eutelsat remains substantially more exposed to North Africa and the Middle East. 5. High-Throughput constellations to drive accelerating data demand
Figure 17: Overview of High-Throughput (HTS) Global satellite constellations currently planned Operator Constellation Launch date Frequency band Satellites Coverage Services Inmarsat GX Successful 1st launch KA GEO 90% of Earth Mainly data in December 2013. Global by end 2014 O3b O3b early 2014 Ka-band spot beam MEO Equator +/- 45 degrees latitude Data Intelsat EPIC first launch in H2 15 Ku-band spot beam GEO Initially the Americas Mainly data Iridium NEXT early 2015 L-band/Ka-Band LEO Global Data Source: Company data, Credit Suisse estimates Intelsat EPIC Intelsat's participation in the HTS business is the EPIC constellation with the first EPIC satellite, Intelsat 29e, scheduled for launch in 2015 for the 50 degrees West orbital slot. The EPIC platform is both FSS and MSS, making it more of a competitor to Inmarsat. The EPIC constellation differs from Inmarsat's Global Express constellation in that it is Ku spot beams rather than Ka band spot beams which is also the case with the O3b satellite constellation. The Ku band spectrum is lower frequency than Ka band making it less sensitive to rain fade. However, the two platforms offer broadly the same type of services. Furthermore, Intelsat will not offer global coverage with the EPIC constellation, at least not initially. With the Intelsat 29e satellite it will mainly cover the Americas. Coverage will materially increase with the scheduled launch of Intelsat 33e in 2016 (60E) – see Figure 19 for more detail on EPIC coverage. Under a contract with Boeing for a total of four satellites (includes the Intelsat 33e) Intelsat has ordered an additional three EPIC satellites, of which 1 will be launched each year, and gradually increasing footprint, according to press articles. Although the launch of the first EPIC satellite is still more than a year away, Intelsat has already started to sell capacity and has announced that a few anchor customers have signed up, giving a total backlog of $500m of revenues (around $50m per year, 20% of annual revenues). We set out the announced key contracts signed below Figure 18.
Figure 18: Intelsat Epic key contracts Customer Term Throughput (Gbps) Capacity Region Sector Harris CapRock 10 1.2 500MHz Gulf of Mexico, CONUS*, Offshore Brazil Energy Panasonic Avionics 10 1.0 600MHz North Atlantic Aeronautical MTN 10 2.0 750MHz Caribbean Cruise Source: Company data
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Figure 19: Intelsat EPIC coverage
Source: Intelsat O3b Networks In June 2013, O3b Networks ("Other 3 billion" of the world's population without access to terrestrial broadband), 47% owned by SES, launched the first four of a constellation of eight satellites planned for 2013. After the successful launch in June, O3b announced on 9 September that two of its satellites in orbit exhibited power anomalies on their payloads and, as a result, the company decided to postpone the launch of the second four satellites, initially planned for 30 September 2013. It now expects them to be launched early in 2014, delaying the positive contribution to come through to SES to late 2015. O3b wants to tap three main areas of opportunities, overlapping with Inmarsat in most of its services and increasing competition in the MSS space.
■ Government: During 2013, O3b signed agreements with several local authorities and operators to provide broadband connectivity to rural areas in e.g. Malaysia, Peru, Liberia, and Somalia. O3b is focused on providing connectivity via its high throughput services to mobile platforms including aircraft and drones for military use.
■ Energy: O3b is also entering the energy space where, similar to Inmarsat, it intends to provide coverage for offshore platforms, offering high speed broadband services for tripulation uses and data management
■ Maritime: Maritime has been a focus for O3b, signing high profile contracts with Royal Caribbean and Carnival during 2013 to provide broadband connectivity to their cruises, increasing customer satisfaction.
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Figure 20: O3b Networks coverage map—within 45 degrees of latitude North and South of equator
Source: O3b coverage map
Figure 21: Recent contracts announced by O3b networks Date Partner Geography Activity Nov-13 Somtel Somalia O3b Trunk Sep-13 Palau National communications Palau broadband Jul-13 RCS Communications South Sudan broadband Jun-13 Maju nusa Malaysia 3G Mobile Mar-13 ISP provider Democratic Republic Congo broadband Mar-13 Interactive E Pakistan mobile backhaul and trunking Mar-13 West Africa Telecoms Liberia O3b Trunk Jan-13 American Samoa broadband Jan-13 Royal Caribbean Global Cruise Ship broadband Source: Company data O3b Networks intends to provide broadband connectivity to areas where the reach of terrestrial infrastructure is limited. The company identified a potential 3bn people that unable to receive good broadband connectivity at high speeds because of inexistent infrastructure. Inmarsat—GX programme to gather momentum over 2014 Global Xpress is a constellation of three high-speed high-frequency Ka-band satellites costing over US$1.2bn over 2010-14. This represents a significant opportunity to generate incremental revenue in the Maritime segment but also opens up a substantial opportunity for Inmarsat to generate incremental Land, Aviation and Global defence revenue. We expect Inmarsat's Global Xpress programme to gather momentum over 2014 following the successful launch of the first GX satellite. Inmarsat announced in early December that it had successfully launched its first GX (Global Xpress) satellite, which represents a major milestone in Inmarsat’s plan to deploy its next generation constellation (consisting of three satellites in total). The next two GX satellites are set to launch in 2014 to enable global GX coverage heading into 2015. The first GX launch has significant importance given:
■ It will allow Inmarsat to showcase the GX constellation to potential end customers, some of whom will want to see the product before committing;
■ The launch is the first important step in having GX global coverage by end 2014, well before Inmarsat’s competitors have anything similar; and
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■ The Proton launch vehicle has suffered an unusually high number of launch failures over the past two years. Conclusion—New HTS constellations to accelerate high-speed data demand In conclusion, we expect the emergence of several High Throughput Satellite constellations (HTS) to accelerate demand for high-speed data over satellites. Just as in the terrestrial (wireline and mobile) world of developed markets, we expect demand for high-speed data to accelerate in the global satellite industry. 6. Terrestrial Fibre and mobile build-out not a near-term threat Looking into the cost structure of Sky UK, Sky Deutschland and Pro7, costs for satellite transmission are less than 5% of the total opex base for all operators (Figure 22). Figure 22: Satellite transmission <5% of total cost base
6%
5%
4%
3%
2%
1%
0% SkyD BSkyB Pro7 Source: Company data, Credit Suisse research In our view, this should protect the satellite operators to some extent as there are relatively few costs to save from switching from satellite transmission to a terrestrial fibre alternative. Furthermore our view remains that DTH broadcasters are unlikely to switch satellite providers due to the prohibitive cost of realigning several million satellite dishes. Figure 23: Fibre customers as % of retail customer base 40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 Q313
BT Retail FTTC DT FTTC TEF FTTH PT FTTH KPN FTTH Orange FTTH Teliasonera Fibre Talk Talk Fibre
Source: Company data, Credit Suisse research Near term, we are not seeing Over-The-Top TV (OTT TV) or a wider fibre roll-out as a high risk to the FSS operators for DTH video distribution or feeding fibre/cable head-ends. With satellite transmission such a small part of broadcasters’ cost base (<1% for Pro7 on our estimates), materially less than content costs, we believe broadcasters, at least in the near
Global Satellite 17 07 February 2014 to medium term, will continue to use satellites as back-up to fibre. To sustain our view, we also show in Figure 23 the evolution of fibre penetration on operators' retail customer base where growth is relatively flat in some cases.
Figure 24: US TV subscriber base 70,000
60,000
50,000
40,000
30,000 TV subscribers ('000) subscribers TV 20,000
10,000
0
Cable TV subs DBS/DTH (satellite) Telco TV subs
Source: Company data, Credit Suisse research This view was further supported by comments from US broadcasters such as HBO, PBS and Disney at the Satellite 2012 conference in Washington in March 2013; they did not expect to reduce the amount of satellite capacity leased in the medium term as satellite is still the most cost-effective way of reaching out to the mass market (point to multipoint). Furthermore, the broadcasters pointed out that with distribution being such a small cost in relation to content, they will continue to use satellite as a back-up even when fibre becomes more accessible. In Figure 24 we set out the TV subscriber numbers for Cable TV, DBS (Direct Broadcast Satellite) and Telcos. The US market is far more developed than Europe with regards to both fibre roll-out by incumbents and adoption of OTT TV. However, Figure 24 shows that satellite has continued to gain subscribers, despite more competition from fibre and OTT TV. We believe TV is more protected against pressure on pricing than data services, especially in the larger DTH markets such as Germany and the UK, for the following reasons: ■ The cost for a DTH operator with a material subscriber base to switch operator is substantial. To change satellite operator, the DTH platform would also need to realign all of its customer satellite dishes to a different orbital slot. We believe the cost of sending out a technician to realign a satellite dish would be around €200 per household and, taking Sky UK, as an example, with a subscriber base >10m, the cost would be >GBP1.6bn, around 180% of Sky UK’s annual cost base and close to 14x the annual satellite transmission cost. We do not rule out that tracking antennas, which could automatically realign themselves to a different orbital slot, may be available at some stage; however, at present, there is still a considerable cost to realign. ■ There is currently a lack of satellite capacity on the most attractive orbital slots covering Western Europe (SES’s 19.2E orbital slot and Eutelsat’s 13E orbital slot). To remain competitive, DTH providers need to be able to add new channels to their bundles and follow new technology developments. Content quality seems to have become increasingly important; this is particularly highlighted in Germany where satellite recently gained some market share on better HD content (partly through HD+).
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7. Global satellite industry consolidation to continue Over the past 12-24 months, we have seen an increase in consolidation activity. Given the FSS industry is characterised by substantial economies of scale and the presence of several smaller government-owned satellites adding pressure on the low end data services market (generally a market for smaller niche players), we believe there is further room for consolidation in the global satellite industry with subscale players potentially looking to exit. Below, we highlight the four satellite operators that were up for sale in 2013, according to widespread press reports, and we show the two announced deals. However, in our view, there could potentially be several more smaller satellite operators that could be up for sale at some stage, such as Hispasat and Optus (owned by Singtel and up for sale earlier in 2013). Space Com (Amos) Most recently, according to Digital TV News, Amos (owned by Spacecom of Israel), could be up for sale as the company filed with the Tel Aviv Stock Exchange to explore the possibility of a merger or acquisition. Amos has been named as one of the more aggressive operators putting pressure on pricing in both CEE and Africa. Israeli press suggests the controlling shareholder Eurocom group (also owns Bezeq), is looking for 2bn shekel (around $700m) for Space Com, vs. current market cap of around $1bn and implying around 17x 2012 EV/EBITDA (Space Com had 1.4bn shekel of net debt at the end of 2012).
Figure 25: Amos Space Com satellite fleet and upcoming launches Existing satellites: Orbital slot Services Ku Ka C Region Launched Amos-2 4W DTH, Cable, Data 22x36MHz US, ME, Europe 2003 Amos-3 4W DTH, Cable, Data 26x36MHz 2x450MHz US, ME, Europe 2008 Amos-4 65E DTH, Cable, Data 8x108MHz 4x216MHz SE and C Asia, ME, Africa 2012 Amos-5 17E DTH, Cable, Data 18x72MHz 14x72MHz, 4x36MHz Africa, ME and Europe Dec-11
Upcoming launches Amos-6 4W N/A 2015 Amos-7 40W N/A 2014 Source: Company data, Credit Suisse research Measat Reuters reported in March 2012 that Arabsat was in talks with Ananda Krishnan, the owner of the Malaysian satellite operator Measat, to acquire a stake in Measat but that the negotiations had stalled over differences in valuation. Krishnan is Malaysia's second richest man (according to Reuters). Arabsat went on to acquire the Greek satellite operator Hellas Sat in early 2013.
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Figure 26: Measat satellite fleet and upcoming launches Existing satellites: Orbital slot Services Ku Ka C Region Launched Measat-3 91.5E 59 45 Malaysia, Indonesia, South Asia End 2006 Measat-3a 91.5E 59 42 Asia, Australia, ME, East Africa 2009 Measat 5 (Payload on 119.5E Aug-05 Thaicom 4) Measat 2 (inclined orbit) 148E Asia Pacific and Hawaii Africasat-1 (inclined orbit) 46E Europe and Africa Africasat-1a/Azerspace-1 46E Feb-13
Upcoming launches Measat 2a 148E Ku/C-band Asia Pacific and Hawaii 2014E Measat 3b 91.5E Ku-band Malaysia, Indonesia, S Asia and Australia 2014E Africasat 2a 6E 2014E Measat 3b 91.5E 2014E Measat 3c (payload on 88E 2015E Jabiru-1) Source: Company data, Credit Suisse research Telesat While much larger than the aforementioned assets, the Canadian satellite operator Telesat is another asset that could be up for sale according to a press article from Reuters on 22 January, which noted that the main shareholders of Telesat, Loral Space & Communications (62.8% stake) and Canada's Public Sector Pension Investment Board (PSP) (35.3% stake) had evaluated their options to either IPO or sell Telesat in 2010-2011 but retained their stakes. Telesat could potentially be up for sale at some stage, in our view.
Figure 27: Telesat satellite fleet and upcoming launches Existing satellites: Orbital slot Services Ku Ka C X Region Launched Anik F1 107.3W broadcasting, data 42 36 North America Nov-00 Anik F1R 107.3W broadcasting, data 32 24 North America Sep-05 Anik F2 111.1W broadcasting, data 32 38 24 North America Jul-04 Anik F3 118.7W broadcasting, data 32 2 24 North America Apr-07 Nimiq 1 91W DTH and broadcast 32 North America May-99 Nimiq 2 91W DTH and broadcast 32 2 North America Dec-02 Nimiq 4 82W DTH and broadcast 32 8 North America Sep-08 Nimiq 5 72.7W DTH and broadcast 32 North America Sep-09 Nimiq 6 91W DTH and broadcast May-12 Telstar 11N 37.5W satellite TV transmission 39 Asia, Europe, the Middle East and the Americas Feb-09 Telstar 12 15W satellite TV transmission 38 Asia, Europe, the Middle East and the Americas Oct-99 Telstar 14 63W satellite TV transmission 41 Asia, Europe, the Middle East and the Americas Jan-04 Telstar 18 136E satellite TV transmission 16 38 Asia, Europe, the Middle East and the Americas Jun-04 Anik G1 107.3W broadcasting, data 28 0 24 3
Upcoming launches Region Launched Telstar 12V 15W Data services Late 2015E Source: Company data, Credit Suisse research Optus In March 2013, SingTel launched a review of its options including a potential sale of its Australian satellite operator, Optus. The attempted sale was cancelled in August when SingTel announced released a statement saying it is committed to growing and investing in the satellite business. During the review, the press reported there were several parties interested in Optus and also discussed a price in excess of $2bn.
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Figure 28: Optus satellite fleet and upcoming launches Existing satellites: Orbital slot Services Ku Ka C L Region Launched Optus B3 (inclined orbit) 164E 22.5 1 Australia, New Zealand 1994 Optus C1 156E Commercial and military 32 Australia, New Zealand, E Asia, Hawaii 2003 Optus D1 160E DTH and data 36 Australia and New Zealand Oct-06 Optus D2 152E DTH and data 36 Australia and New Zealand Oct-07 Optus D3 156E Media 36 Australia and New Zealand Aug-09
Upcoming launches Optus D10 166E 2014E Source: Company data, *Note: Transponders are 36MHz equivalent Avanti acquires frequencies at 21.5E It was made announced in December 2013 that Avanti had acquired frequencies on the 21.5E orbital slot. These frequencies are said to have another year or two until they reach end of life. According to an article in Advanced Television in October 2013, these frequencies were valued at close to $100m but were potentially given to Avanti for free although this was not confirmed. Avanti owns three satellites: Artemis, Hylas-1 and 2. Eutelsat acquisition of Satmex Eutelsat's acquisition of Satmex increases its presence in the region. The Mexican satellite operator currently is present in Mexico and in Southern America, with the exception of Brazil. Eutelsat's capacity in Latam will increase further with the launch of Satmex-9 in 1Q14 and with Eutelsat 65WestA, the latter planned for launch in 2016. With these two launches, the company plans to tap the Brazilian market, expanding its presence in Latam. The above satellite operators are only a few of the potential acquisition targets. We believe all three of the listed FSS operators (Eutelsat, Intelsat and SES) could be interested in consolidating the industry. However, with Eutelsat still working on closing the Mexsat acquisition, the appetite for larger acquisitions could be limited. Eutelsat and SES are less leveraged at (2-3.5x Net debt/EBITDA) than Intelsat at close to 7x, increasing the potential for larger deals. However, Intelsat has said on recent investor calls it does not rule out participating in consolidation as long as deals are FCF accretive. Going into 2014, we expect continued press comments on potential consolidation in the sector. 8. Satellite launch delays remain an 'industry hazard' Satellite launch delays and the reliability of launch vehicles remain major concerns for the satellite industry. Our covered companies have been negatively affected by satellite delays over the last 12 months, which led us to downgrade our estimates for SES and Inmarsat. The impact of these events varied among different companies and is outlined below: Eutelsat Recent delays for Eutelsat include the two satellites in partnership with RSCC, AT-1 and AT-2. These two satellites were initially scheduled for 4Q13 and are now scheduled to be launched in March 2014 bringing additional 27 new transponders for DTH broadcasting in Russia. 16 of these 27 transponders were pre-sold, contributing to the order backlog.
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Figure 29: Eutelsat satellite launch schedule Expected Date Satellite Orbital slot Services provided Additional Transponders Q1 2014 Express-AT1 56E DTH Broadcast and broadband in Russia 27 Q1 2014 Express-AT2 140E DTH Broadcast and broadband in Russia H1 2014 Eutelsat 3B 3E DTH Broadcast and data 30 Ku-band, 9 Ka- band, 12 C-band Q1 2015 Eutelsat 9B 9E DTH Europe and MENA 60 Ku-band Q3 2015 Eutelsat 8 West 8W DTH MENA 40 Ku-band, 10 C-band B H2 2015 Eutelsat 36C 36E DTH and Broadband in Russia and Sub-Saharan 70 Ku/Ka bands Africa H1 2016 Eutelsat 65 West 65W Video, Data, broadband in Latam 58 C/Ku/Ka bands A Source: Company data The impact from these two satellites is reflected in our estimates for Video and Applications revenues, which will bring additional growth in H2 FY June 14 and the year after, but, as a result of launch delays, will negatively impact revenues in the next two quarters. The changes to our estimates are detailed in Eutelsat company section of this report. SES Over 2013, SES was impacted by satellite launch delays. As of 2012 year-end, SES planned to launch four satellites in 2013. Initially, SES-6 was planned to be launched in 1Q13. By year-end 2012, it was re- scheduled for 2Q13. It was finally launched on 3 June 2013 and is already fully operational. During 1Q13, Astra 2E was re-scheduled to 3Q13, as well SES-8 and Astra- 5B with these two then further rescheduled to 4Q13. SES-8 was launched earlier in December, and Astra 5B is not expected to go up until 1Q14. When we last reviewed SES, in our 3Q13 results preview, published on 16 October, 2013, we changed our forecasts incorporating the impact of these new satellite delays. Given the more encouraging recent sequence of successful launches, and a slightly less exposure to satellite launches for 2014, we now make only minor adjustments to our forecasts for SES, as we are slightly more optimistic regarding upcoming launches. These changes are discussed further in this report in the SES company section.
Figure 30: SES satellite launch schedule Expected Date Satellite Orbital slot Services provided Additional Transponders Q1 2014 ASTRA 2G 28.2E Broadcast and data to Europe, ME, Africa +10 Q1 2014 ASTRA 5B 31.5E TV for Eastern Europe and L-band payload for EGNOS +21 H1 2015 SES-9 108.2E DTH broadcasting in Northeast Asia, South Asia and 53 Indonesia, maritime for Vessels in the Indian Ocean 2016-2018 1-3 Satellites N.A. Asia and Latin America N.A. Source: Company data Intelsat We do not see the recent delays having any material impact on Intelsat. Intelsat's next satellite launch is not until the end of 2014 when the Intelsat 30 satellite is scheduled for launch, and the launch has already been contracted with Arianespace. The indirect impact from the Proton launch failures is an increase in insurance premiums, however, the satellite insurance companies have stated that insurance premiums are more impacted by the launch history of a specific launch vehicle; therefore, we see little risk of impact on Intelsat on launch insurance premium.
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Figure 31: Intelsat satellite launch schedule Launch schedule Orbital location Coverage Scheduled Application Comment Launch vehicle launch Intelsat 30 95W Americas Q314 DTH Fully leased by Arianespace DirecTV Intelsat 31R 95W Americas Q315 DTH Fully leased by Arianespace DirecTV Intelsat 34 (27R) 304.5E (55.5W) Americas 2015 Media services To replace IS-805 Arianespace Intelsat 29e 310E Americas 2015 Broadband Arianespace Intelsat 33e Asia, Europe, Africa 2016 Broadband Arianespace Source: Company data Inmarsat—1st GX satellite successfully launched Inmarsat announced in early December that it had successfully launched its first GX (Global Xpress) satellite. The successful launch of the first GX satellite represents a major milestone in Inmarsat’s plan to deploy its next generation constellation (consisting of three satellites in total). Inmarsat is expected to launch the second and third GX satellites over 2015 on the Proton launch vehicle. Conclusion—Further satellite launch delays inevitable but impact on industry growth minimal In conclusion, we see satellite launch delays as unavoidable in the industry although small delays do not impact medium-term growth. Launch failures are much more serious (and cause delays while investigated) but remain statistically uncommon.
Global Satellite 23 07 February 2014 FSS supply/demand model—Extended Europe In our last review of the satellite sector in April 2013, we looked at supply and demand for satellite capacity in Extended Europe, Eutelsat's main geographic region. We concluded that demand would exceed supply by 2015 (Figure 37), and this was our main argument for remaining optimistic on the satellite industry. In this report, we update our model to reflect recent developments, not only in the Extended Europe footprint, but also on a global footprint, to have a better coverage of Intelsat and Newsat's footprints. Our models include new satellite launches, launch delays and an update to our detailed demand model. We believe Extended Europe is also very relevant for SES as we expect the majority of SES growth over the next three years to be driven by satellite demand in this region and in Latam. How we construct our FSS supply/demand model for Extended Europe Our FSS supply/demand model focuses on the Extended Europe region (Europe, CIS/Central Asia, MENA and Sub-Saharan Africa as set out in Figure 33) as it is Eutelsat’s main footprint and the footprint where much of SES’s incremental capacity will be directed over the next three years. SES also has a large exposure to North America (22% of revenues) but as the North American market is increasingly saturated and SES is reducing, not increasing, its exposure by not replacing satellites when they reach end-of-life, we continue to focus on the Extended Europe footprint for our detailed analysis. Figure 32: World map with longitude lines
Source: www.Satsig.net
Figure 33: Extended Europe overview Regions pops Internet users as % TV market Key TV platforms ETL SES of total pops exposure* exposure* Europe 500m 74% ~60% pay-tv penetration in Sky UK, Sky Italy, Sky 86.8% 64.7% W Europe and 70% TV set Germany, Cyfra+ (Poland), penetration of homes in CEE UPC, Tring (Croatia) Central Asia (incl Russia) 210m 50% ~35% pay-TV penetration Tricolor (Russia), Digiturk 30.0% 29.4% (Turkey), Viasat Ukraine Middle East & North Africa 600m 29% in Arab States, 56% of TV households watch Al Jazeera, OSN, Multichoice 90.0% 26.5% 13% in Africa FTA DTH signals Africa Sub Saharan Africa 900m 13% in Africa ~20% TV penetration Multichoice Africa 20.0% 17.6% Source: Company data, Credit Suisse research, *Note ETL and SES exposure is defined as % of satellites covering the region. The total is >100% as a satellite can cover more than 1 region Demand to exceed supply by 2015 in Extended Europe After updating our Extended Europe supply/demand model, we still see demand for FSS capacity to exceed supply from 2015 (Figure 34 and Figure 37). We show below a detailed explanation for our changes in Video and Data demand forecasts, and for the changes we made in our supply model. Figure 34 provides a snapshot of the mismatch between incremental capacity supplied and demanded, after our model updates:
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Figure 34: Changes to Credit Suisse transponder demand and supply model # of transponders 2013E New 2013E Old Change 2014E New 2014E Old Change 2015E New 2015E Old Change Video 121 114 7 112 126 -14 112 132 -20 Voice and data 181 181 0 166 166 0 188 188 0 Incremental transponder 302 294 8 278 292 -14 300 320 -20 demand
Incremental transponder 224 368 -144 520 395 125 270 284 -14 supply Source: Credit Suisse estimates Video and data applications—only small changes to forecasts In this report, we update our estimates for DTH TV market channels in Extended Europe and capacity required. We have slightly revised up our estimates for HD in 2013 and adjusted the number of 4k channels per transponder from 2 to 3, balancing faster take-up of 4k with improved compression ratios. Upside risk for 4k forecast There is upside risks to our estimates for 4k channel growth which could be quicker than what we forecast. As mentioned earlier in this report, Figure 14 shows HD vs. 4k penetration since year 1 of launching. The figures shows a much higher take-up for HD channels than for 4k. At a time when consumers have already experienced the image improvements brought by HDTV, 4k could potentially take-off quicker.
Figure 35: Credit Suisse DTH TV channel and transponder model for Extended Europe (number of channels) Video market forecast 2012 2013E 2014E 2015E 2016E 2017E HD channels 1,184 1,480 1,806 2,167 2,600 3,120 growth y/y 48.6% 25.0% 22.0% 20.0% 20.0% 20.0% Ultra HD (4k) 0 5 35 80 120 190 growth y/y 600.0% 128.6% 50.0% 58.3% 3D Channels 27 45 60 70 75 79 growth y/y 80.0% 66.7% 33.3% 16.7% 7.1% 5.0% SD Channels 10,433 10,694 10,908 11,017 11,072 11,072 growth y/y 2.8% 2.5% 2.0% 1.0% 0.5% 0.0% TV Channels 11,644 12,224 12,808 13,334 13,867 14,461 Growth 6.0% 5.0% 4.8% 4.1% 4.0% 4.3% As % of total HD channels 10.2% 12.1% 14.1% 16.2% 18.7% 21.6% Ultra HD channels 0.0% 0.0% 0.3% 0.6% 0.9% 1.3% 3D channels 0.2% 0.4% 0.5% 0.5% 0.5% 0.5% SD channels 89.6% 87.5% 85.2% 82.6% 79.8% 76.6%
Transponder demand Ch/trpx Trpx for HD 4 296 370 451 542 650 780 Trpx for Ultra HD 3 0 2 12 27 40 63 Trpx for 3D 3 9 15 20 23 25 26 Trpx for SD 12 869 891 909 918 923 923 Transponder demand 1,174 1,278 1,392 1,510 1,638 1,792 growth 9.2% 8.8% 8.9% 8.5% 8.5% 9.4% Source: Company data, Credit Suisse estimates
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Downside risk for 4k forecast The main risks to our view on 4k take-up relate to; 1) the considerable amount of capex requirements for telcos to upgrade SEBs to be compatible with HEVC standouts, and 2) compression ratios might improve at a quicker rate than 4k take-up, leading to a gap between capacity supplied and demand. We outline below in Figure 35, our estimates for DTH TV in Extended Europe: No changes in demand from use of UAV and Corporate networks Lastly, we reiterate our forecasts for military and corporate network demand for satellite capacity, after downward revisions in April last year.
Figure 36: Credit Suisse forecasts for transponders used in drones and corporate networks 2012 2013E 2014E 2015E 2016E 2017E VSAT sites EE ('000) 723 810 891 962 1,020 1,071 Growth 13% 12% 10% 8% 6% 5% Trpx used in Corporate Networks 723 810 891 962 1,020 1,071 2. UAV forecast US 679 706 734 756 779 803 France 23 24 27 31 34 38 Germany 9 14 19 31 46 61 Italy 5 8 14 20 26 32 Turkey 28 29 34 39 44 49 UK 5 13 28 43 58 73 Russia 30 45 60 75 90 105 China 50 90 160 220 270 320 India 38 46 52 60 66 73 Israel 26 31 36 41 46 51 Other 10 20 30 40 55 70 Total 903 1,026 1,194 1,356 1,514 1,674 growth y/y 19.2% 13.7% 16.4% 13.6% 11.7% 10.5%
Assumed Utilisation rate 60% 55% 50% 48% 48% 47% Drones in use 542 568 596 657 720 785 Transponders/utilised drone 1.5 1.6 1.6 1.7 1.7 1.8 growth y/y 5.0% 4.0% 3.0% 2.0% 2.0% Transponders needed globally 813 894 977 1,108 1,240 1,378 growth y/y 13% 10% 9% 13% 12% 11% incremental transponders needed 93 82 82 131 132 138 o.w. Extended Europe 80% 80% 80% 80% 80% 80% incremental transponders needed 75 65 66 105 105 111 4. Summary Drones 650 716 781 886 992 1,102 growth yoy 13.0% 10.1% 9.2% 13.4% 11.9% 11.1% Corporate networks (VSAT) 723 810 891 962 1020 1071 growth yoy 13.0% 12.0% 10.0% 8.0% 6.0% 5.0% Other data 354 383 402 414 426 439 growth yoy 10% 8% 5% 3% 3% 3% Total data transponders 1,728 1,908 2,074 2,262 2,438 2,612 growth yoy 12.4% 10.4% 8.7% 9.1% 7.8% 7.2% Incremental transponders for data 190 181 166 188 176 174 Source: Company data, Credit Suisse estimates
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Satellite Global Figure 37: Extended Europe Transponder demand vs. supply (Jan 2014) Figure 38: Extended Europe Transponder demand vs. supply (April 2013) 600 500 450 500 400 400 350 300 300 250 200 200
150 trpx(36MHz equivalent) 100 trpx(36MHz equivalent) 100 50 0 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 0 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Incremental capacity Incremental demand Incremental capacity Incremental demand
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 39: Incremental Extended Europe Transponder supply (January 2014 Figure 40: Incremental Extended Europe Transponder demand (January 2014 vs. April 2013) # of transponders * vs. April 2013) # of transponders *
600 500 450 500 400 350 400 300 300 250 200 200 150 100 100 50 0 0 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Supply model (Jan-2014) Supply model (Apr-2013) Demand model (Jan-2014) Demand model (Apr-2013) 2014 February 07 Source: Company data, Credit Suisse estimates Note 2012 data changed slightly given more Source: Company data, Credit Suisse estimates Note 2012 data changed slightly given more accurate historical data. accurate historical data.
27
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Supply—2013-15 update for new launches and delays We update our forecasts for supply and demand for FSS transponders in Extended Europe, to consider whether pricing will remain benign. We have made adjustments to our Extended Europe transponder supply model to reflect (1) recently announced new satellite launches, and (2) announced delays over the past six months. We set out new launches and delays in detail below and summarise launches by major global operator over the 2013-15 in Appendix 2.
Figure 41: Summary of Credit Suisse transponder (36MHz equivalent) demand model 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Video 1,331 1,412 1,495 1,595 1,698 1,812 1,930 2,058 2,213 growth y/y 3.4% 6.1% 5.9% 6.6% 6.5% 6.7% 6.5% 6.6% 7.5% Net Ads 44 81 83 99 103 114 118 128 155 Voice and data 1,121 1,315 1,537 1,728 1,904 2,075 2,255 2,447 2,615 growth y/y 8.8% 17.3% 16.9% 12.4% 10.2% 9.0% 8.6% 8.5% 6.9% Net Ads 91 194 222 190 176 171 179 192 168
Utilised transponders 2,452 2,727 3,033 3,322 3,602 3,888 4,185 4,505 4,827 growth y/y 5.8% 11.2% 11.2% 9.5% 8.4% 7.9% 7.6% 7.6% 7.2% incremental demand 135 275 305 290 280 286 297 320 322
Voice and Data Split 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E UAVs 415 495 575 650 711 782 879 1,001 1,105 growth y/y 10.7% 19.3% 16.2% 13.0% 9.4% 10.0% 12.3% 13.9% 10.4% Net ads 40 80 80 75 61 71 96 122 104
Corporate networks 480 540 640 723 810 891 962 1,020 1,071 growth y/y 4.3% 12.5% 18.5% 13.0% 12.0% 10.0% 8.0% 6.0% 5.0% Net ads 20 60 100 83 87 81 71 58 51 other data 226 280 322 354 383 402 414 426 439 Source: Company data, Credit Suisse estimates We break down Voice&Data demand into three sub-categories: Corporate networks (VSAT), UAVs and other demand. In the definition of corporate networks, we include 2014 February 07 connection for remote offices, connection of oil rigs, consumer satellite broadband and Maritime VSAT connections to yachts. In other data services, we include mainly IP- trunking and cellular backhauling.
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07 February 2014
Global demand and supply model We set out a summary of and changes to our global satellite transponder demand and supply model in Figure 42 to Figure 45. Our global forecasts looks broadly similar in trends to our forecasts for Extended Europe with a peak in incremental satellite transponder supply in 2014 but with incremental demand catching up again in 2015-2016. Since we first published the demand and supply model in May 2013, the outlook for global satellites has worsened slightly and we have made the following key changes to our model to reflect this: Supply – launches pushed out and new satellites (mainly government) announced
■ We have noted more than 12 satellite launch delays from 2013 into 2014. Some of these are due to the launch issues with the Proton rocket (as discussed earlier in this note) pushing out some new satellite launches into 2014. We further believe some of the satellites may have been pushed out due to financing issues and various other reasons such as delays in manufacturing. We have also noticed several launch delays from 2014 to 2015.
■ There are also several new satellites announced for launch, of which many belong to governments such as Belarus, Laos, Congo and Bulgaria. Demand—slower uptake of Ultra HD
■ We have reduced our forecasts for Ultra HD in 2018E from 500 to 280. We are taking a more conservative approach, partly to bring our forecasts more in line with our Extended Europe forecasts. We now forecast 550 Ultra HD TV channels globally by the end of 2020E versus 420 in Extended Europe. The majority of the difference is to be made up by the North American market.
■ We have also reduced our forecasts for incremental demand coming from other data services, mainly point-to-point services. The pressure on this segment mainly for Intelsat has led us to become more conservative than six months ago.
07 February 2014 February 07
Global Satellite 29
07 February 2014
Figure 42: Global Incremental Transponder demand vs. supply (Nov - 2013) Figure 43: Global Incremental Transponder demand vs. supply (May 2013) 800 800
700 700
600 600
500 500
400 400 band band 36Mz transponders
band band 36Mz transponders 300 300
- -
200 200
and and Ku
and and Ku
-
- C C 100 100
0 0 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Incremental supply Incremental demand Incremental supply Incremental demand
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 44: Incremental Global Transponder supply (Nov 2013 vs. May 2013) # Figure 45: Incremental Global Transponder demand (Nov 2013 vs. May 2012) of transponders # of transponders 800 800
700 700
600 600
500 500
400 400
300 300
band 36MHz band transponders 36MHz band transponders 36MHz
- -
200 200
and and Ku and Ku
- - C C 100 100
0 0 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
07 February 2014 February 07 Incremental supply (Nov - 13) Incremental supply (May - 13) Incremental demand (Nov - 13) Incremental demand (May - 13)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Global Satellite 30
07 February 2014 Satellite operators' exposure to key global industry themes In this section, we evaluate the relative exposure of the global satellite operators to the eight key themes impacting the industry over 2014, summarising the exposure in Figure 44 and also setting out Credit Suisse estimates of the proportion of revenues derived from different end user categories of satellite capacity. Around 60% of global satellite revenues from DTH TV As we set out in Figure 44, we estimate around 60% of global commercial satellite operator revenue is derived from DTH TV with a further 10% from global government and military and the remaining 30% from connectivity in areas of the world with little or no terrestrial coverage (including Maritime, Aeronautical and VSAT). Positive trends As discussed earlier in this report, we see four positive trends currently impacting global satellites:
■ Less pressure on US Defence spend;
■ 4k broadcasting becoming a reality over the next five years;
■ The launch of high-throughput satellites driving accelerating demand for high-speed broadband services over satellite (including Inmarsat's GX and Intelsat's EPIC constellations); and
■ Potential future industry consolidation. Negative trends Offsetting the positive trends outlined above, we highlight four negative trends:
■ SD channel shutdown;
■ Oversupply in Africa and the Middle East regions;
■ Continued growth in terrestrial fibre and mobile coverage; and
■ Potential satellite launch delays. Conclusion on stocks In Figure 46, we set out our view of the relative exposure to these trends of the satellite operators under our global coverage in order to determine an overall net exposure. In conclusion, we see SES, Inmarsat and NewSat as having overall net positive exposure while we see Eutelsat and Intelsat as having a more balanced revenue growth outlook. This conclusion is key to driving our relative ratings of the global satellite stocks. We reiterate our Outperform ratings on SES, Inmarsat and NewSat while reiterating our Neutral rating on Intelsat. We reinstate coverage on Eutelsat with a Neutral rating consistent with our relative exposure table. In the following pages, we give a more detailed view of the global satellite stocks including changes to our forecasts.
Global Satellite 31
Satellite Global Figure 46: Satellite operator exposure to key themes Satellite operator exposure to key themes
Revenue breakdown Type Global Industry SES Eutelsat Intelsat Inmarsat**** NewSat****** DTH TV DTH ~60% ~70% ~70% ~12% - 22% US DoD/government combined US Gov ~8% ~10% ~7% ~18% ~25-30% 12% of which US DoD ~5% ~5% ~7% - n/a of which US Government ~3% ~5% - - n/a Other global military/government Other Gov ~2% ~2% ~2% ~1% ~5% 14% Video, data and voices services L-band/VSAT ~25% ~18% ~20% ~69% ~65% 52%
Positives SES Eutelsat Intelsat Inmarsat NewSat 1. US Defence budget pressure to ease US Gov High High Medium High/Medium* Low/Medium 2. 4k (Ultra-HD) demand DTH High High High Low Low 5. High Throughput Satellites (accelerating data demand) VSAT Medium Medium Medium High High 7. Global Satellite industry consolidation All Medium Medium Medium Low High Overall revenue-weighted exposure to +ve industry trends High High Medium High Medium
Negatives 3. Shutdown of SD channels DTH High High Medium Low Low 4. Oversupply in key regions to continue** DTH/L-band/VSAT Medium High High Medium Medium 6. Terrestrial Fibre and Mobile build-out DTH/L-band/VSAT Medium Medium Medium Low Low 8. Satellite launch delays*** All Low Low Low High***** Medium Overall revenue-weighted exposure to -ve industry trends Medium High Medium Medium Low
Overall weighted exposure to Global industry trends Positive Neutral Neutral Positive Positive Source: Credit Suisse research
Notes * Inmarsat has seen incremental pressure from US DoD in its Solutions business over 2013 but limited incremental pressure on its airtime businesss ** Oversupply mainly impacting Africa and Middle East regions, where Eutelsat has more capacity *** Exposure to satellite launch delays is related to launch vehicles. Obviously an operator's own satellite loss is a substantial negative **** Estimated % of MSS revenue ***** Proton launch delay specific ***** NewSat revenue mix reflects singed contracts + sales pipeline for Jabiru-1. Current Teleports revenue not a material driver of valuation. Source: Credit Suisse research
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Global Satellite 33 07 February 2014
Americas / United States Wireless Telecommunication Services
Intelsat S.A. (I) Rating NEUTRAL* [V] Price (04 Feb 14, US$) 19.46 Target price (US$) 25.00¹ 52-week price range 25.15 - 19.01 Reiterate Neutral rating and TP $25 Market cap. (US$ m) 2,051.31 Enterprise value (US$ m) 17,347.01 ■ Event: We maintain our Neutral rating and $25 target price. There are no changes to our forecasts, as we had already factored in continued pressure *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. in the government and point-to-point channel business. Our estimates are ¹Target price is for 12 months. broadly in line with consensus revenue and EBITDA forecasts for 2013- [V] = Stock considered volatile (see Disclosure Appendix). 2015E. Research Analysts ■ Little near-term upside potential: With little new incremental capacity until Joseph Mastrogiovanni 212 325 3757 the next satellite launch in H2 14 (I 30) to drive revenue growth, limited room [email protected] for cash flow improvement from debt refinancing and continued pressure on Henrik Herbst the government business (although slightly improving) we see limited upside 212 325 3149 potential for Intelsat's share price in the near term. [email protected] Michael Baresich ■ Longer-term trends still look attractive: Longer term, we believe demand 212 325-3766 in the satellite industry remains solid. Although the outlook for demand [email protected] supply balance on a global level has worsened slightly, we believe Intelsat's
management has made strategic decisions that position it to take advantage of some of the most interesting growth pockets in the industry, such as LatAm (through the Intelsat 30 and Intelsat 31 satellites) and high throughput satellite demand (through the Epic constellation). On the back of incremental capacity in higher demand areas contributing to revenues from the end of 2014E, we forecast revenue to return to growth in 2014 (by 0.5%) accelerating to around 4% in 2016 and 2017 with EBITDA margins slightly expanding to 52% and 53% respectively from 48% in 2013E. ■ Catalysts: Intelsat will report Q4 13 and full year 2013 in February ■ Valuation: Intelsat is trading at 8.6x 2014E EV/EBITDA.
Share price performance Financial and valuation metrics
Daily Apr 18, 2013 - Feb 04, 2014, 4/18/13 = US$19.25 Year 12/12A 12/13E 12/14E 12/15E EPS (CS adj.) (US$) -0.81 -2.27 2.89 3.29 25 Prev. EPS (US$) — — — — 23 P/E (x) -24.0 -8.6 6.7 5.9 21 P/E rel. (%) -136.7 -51.6 44.6 43.4 19 Revenue (US$ m) 2,610.2 2,604.8 2,617.9 2,650.2 Apr-13 Jul-13 Oct-13 Jan-14 EBITDA (US$ m) 2,016.2 2,017.9 2,026.5 2,035.6 Price Indexed S&P 500 INDEX OCFPS (US$) 8.22 6.06 9.76 9.43 On 02/04/14 the S&P 500 INDEX closed at 1755.2 P/OCF (x) — 3.2 2.0 2.1 EV/EBITDA (current) 8.6 8.6 8.6 8.5 Net debt (US$ m) 15,717 15,037 14,571 14,326 ROIC (%) 6.99 10.50 8.47 8.52
Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 105.41 IC (current, US$ m) 14,404.62 2012A -0.08 -0.60 -0.16 0.03 BV/share (Next Qtr., US$) — EV/IC (x) — 2013E 0.00 -3.46 0.86 -0.18 Net debt (Next Qtr., US$ m) — Dividend (current, US$) — Net debt/tot cap (Next Qtr., %) — Dividend yield (%) — 2014E — — — —
Source: Company data, Credit Suisse estimates.
Global Satellite 34 07 February 2014
Figure 47: Intelsat: Credit Suisse versus consensus forecasts $ in millions, unless otherwise stated 2013E 2014E 2015E CSe Consensus CSe vs. Cons CSe Consensus CSe vs. Cons CSe Consensus CSe vs. Cons Revenues 2,605 2,603 0.1% 2,618 2,606 0.5% 2,650 2638 0.5% adj EBITDA 2,018 1,999 0.9% 2,027 2,019 0.4% 2,036 2023 0.6% EBIT 1,261 1,203 4.8% 1,297 1,316 -1.4% 1,312 1319 -0.5% NI (266) (278) 338 301 385 338
CAPEX (inc cap int) 657 647 1.5% 616 626 -1.6% 809 803 0.7% Source: Company data, Credit Suisse estimates, Consensus forecasts sourced from Factset
Figure 48: Intelsat: Credit Suisse forecasts versus company guidance $ in millions, unless otherwise stated 2013E 2014E 2015E CSe Guidance CSe Guidance CSe Guidance Revenues 2,605 2,602 Margins vs. 2012 0.0 flat CAPEX (inc cap int) 657 $600-675m 616 $575-650m 809 $775-850m Customer prepayments 115 $100-125m 90 $75-100m 44 $25-50m Source: Company data, Credit Suisse estimates
Figure 49: Intelsat: P&L forecast $ in millions, unless otherwise stated Income Statement – 2011 2012 1Q13 2Q13 3Q13 4Q13E 2013E 2014E 2015E Normalised Revenues 2,588 2,610 655 654 652 644 2,605 2,618 2,650 memo: Change y / y 1.7% 0.8% 1.7% 2.4% -0.5% -4.2% -0.2% 0.5% 1.2%
Direct costs of revenue 408 411 98 98 94 97 386 385 403 SG&A 184 179 52 51 52 53 208 206 211 Depreciation 769 765 187 187 186 190 751 729 724 Operating expenses 1,361 1,355 337 336 331 340 1,344 1,321 1,338
Operating Income 1,227 1,256 318 318 321 304 1,261 1,297 1,312 memo: Margin 47% 48% 49% 49% 49% 47% 48% 50% 49% memo: Change y / y 6% 2% 3% 4% 0% -5% 0% 3% 1%
Other Items 20 (4) 0 5 2 0 7 0 0 Adjusted EBITDA 2,017 2,016 506 509 508 494 2,018 2,027 2,036 memo: Margin 78% 77% 77% 78% 78% 77% 77% 77% 77% memo: Change y / y 1% 0% 2% 4% -1% -4% 0% 0% 0%
Interest expense, net 1,311 1,271 318 302 249 247 1,116 922 887 Other income (expenses) (349) (84) (1) (370) (0) 0 (371) 0 0 Loss before income taxes (432) (99) (1) (354) 71 57 (227) 375 425 Provision for (benefit from) (55) (20) (2) (9) (30) 78 36 37 40 income taxes Net loss (377) (79) 1 (345) 101 (21) (263) 338 385 Net income attributable to 1 (2) (1) (1) (1) 0 (3) 0 0 non-controlling interest Net profit/(loss) attributable (376) (81) 0 (346) 100 (21) (266) 338 385 to Intelsat S.A.
No. of Shares 5.000 5.000 99.900 99.900 117.064 117.064 117.064 117.064 117.064 EPS (75.17) (16.18) 0.00 (3.46) 0.86 (0.18) (2.27) 2.89 3.29 memo: Change y / y 44% -78% -100% 377% -127% -126% -86% -227% 14% Source: Company data, Credit Suisse estimates
Global Satellite 35 07 February 2014
Figure 50: Intelsat: Cash flow and leverage forecasts $ in millions, unless otherwise stated Cash Flow 2011 2012 1Q13 2Q13 3Q13 4Q13E 2013E 2014E 2015E Net loss (435) (149) (7) (407) 89 (17) (342) 338 385 Cash flows from operating activities: Depreciation and amortization 769 765 187 187 186 190 751 729 724 Impairment of asset value 0 0 0 0 0 0 0 0 0 Deferred income taxes (73) (62) (4) (3) (32) 34 (5) (5) (20) Amortization of discount, premium, issuance costs 63 57 15 19 6 15 55 45 45 and other non-cash items Net gain (loss) attributable to noncontrolling interest 0 0 0 0 0 0 0 0 0 Other non-cash items 338 100 10 374 22 (7) 400 25 10 Changes in operating assets and liabilities 254 110 (104) (108) 207 (140) (144) 10 (40) Net cash provided by operating activities 916 821 97 63 478 76 714 1,142 1,104
Cash flows from investing activities: Payments for satellites and other property and (845) (866) (167) (169) (144) (176) (657) (616) (809) equipment (including capitalized interest) Other investing activities 4 82 233 235 (1) 0 467 0 0 Net cash used in investing activities (840) (784) 66 66 (145) (176) (190) (616) (809)
Cash flows from financing activities: Increase/(decrease in debt) (215) (25) (20) (502) (20) (156) (698) (536) (233) Equity Financing Activities 2 (9) (2) 570 (3) 0 566 0 0 Other financing activities (265) (106) 2 (428) (1) 26 (400) (60) (50) Net cash used in financing activities (479) (140) (20) (359) (23) (130) (532) (596) (283)
Effect of exchange rate changes on cash and cash 1 (7) (1) (3) (0) (1) (5) 0 0 equivalents/ others Net change in cash and cash equivalents (402) (109) 141 (233) 309 (231) (14) (70) 12
Free Cash Flow Metrics FCF Calculation Cash from operating activities 916 821 97 63 478 76 714 1,142 1,104 Capital expenditures (incl capitalized interest) (845) (866) (167) (169) (144) (176) (657) (616) (809) FCF used in operations 71 (45) (70) (106) 333 (100) 57 526 295 memo: Change y / y 97.3% -162.8% -49.6% -344.2% -646.3% -190.1% -227.3% 824.2% -44.0%
Net Debt Total debt 16,003 15,904 15,891 15,408 15,387 15,206 15,206 14,669 14,436 - Cash & equivalents 297 187 329 96 404 174 174 103 115 = Net debt 15,707 15,717 15,562 15,312 14,982 15,032 15,032 14,566 14,321 / LTM Adj. EBITDA 2,017 2,016 2,025 2,043 2,040 2,018 2,018 2,027 2,036 = Net debt / EBITDA 7.8x 7.8x 7.7x 7.5x 7.3x 7.4x 7.4x 7.2x 7.0x Source: Company data, Credit Suisse estimates
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Global Satellite 37 07 February 2014
Europe / United Kingdom Wireless Telecommunication Services
Inmarsat PLC (ISA.L) Rating OUTPERFORM*
Price (04 Feb 14, p) 693.00 Target price (p) 800.00¹ Market cap. (£ m) 3,106.73 Global VSAT market expected to be worth Enterprise value (US$ m) 6,937.2 $3bn by 2020
*Stock ratings are relative to the coverage universe in each ■ We reiterate our Outperform on Inmarsat and target price of 800p as we analyst's or each team's respective sector. ¹Target price is for 12 months. continue to forecast a strong growth outlook for the company boosted by Global Xpress from 2015. Despite the continued positive growth outlook, we Research Analysts are cutting 2014-17 EBITDA forecasts by 5-7% to reflect 1) higher GX set-up Paul Sidney costs than previously forecast; and 2) the sale of Inmarsat's Retail Energy 44 20 7888 6015 [email protected] operations to Rignet. ■ Global Xpress to gather momentum after first launch success. The first GX launch has significant importance given 1) It will allow Inmarsat to showcase the GX constellation to potential end customers, some of whom will want to see the product before committing; 2) The launch is the first important step in having GX global coverage by end 2014, well before Inmarsat’s competitors have anything similar; and 3) The Proton launch vehicle has suffered an unusually high number of launch failures over the past two years. ■ The Global Satellite Broadband (VSAT) market, according to Comsys, was worth around US$1.9bn in 2010 at the wholesale level (only the satellite traffic portion) which excludes any retail mark-up, equipment sales and value-added services. On our estimates, we believe the VSAT wholesale market will be worth around $3bn by 2020E. We keep our Inmarsat Global Xpress wholesale revenue estimates unchanged at $360m in 2019E (Inmarsat’s current guidance is $500m in 2019 or five years after launch) and $435m in 2020E. This would imply Inmarsat having a 15% share of the wholesale VSAT market by 2020, six years after the launch of Global Xpress. ■ Catalysts: Inmarsat will launch two more GX satellites in 2014. The company will report Q4 results in early March 2014. ■ Valuation: Inmarsat trades on a 2013E PE of ~25x. Share price performance Financial and valuation metrics
Year 12/12A 12/13E 12/14E 12/15E Revenue (US$ m) 1,337.8 1,240.9 1,154.0 1,206.8 690 EBITDA (US$ m) 694.40 644.58 620.20 678.77 590 Pre-tax Profit Adjusted (US$ m) 293.6 276.5 241.8 213.5 490 CS adj. EPS (US$) 0.42 0.44 0.42 0.37 390 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Prev. EPS (US$) — 0.56 0.52 0.60 Price Price relative ROIC (%) 10.06 8.00 7.69 8.10 P/E (adj., x) 27.14 25.93 27.22 30.83 The price relative chart measures performance against the P/E rel. (%) 210.8 190.0 219.1 270.7 FTSE ALL SHARE INDEX which closed at 3491.81 on EV/EBITDA 9.5 10.8 11.7 10.6 04/02/14 On 04/02/14 the spot exchange rate was £.83/Eu 1. - Dividend (12/13E, c) 46.50 IC (12/13E, US$ m) 2,979.79 Eu .74/US$1 Dividend yield (%) 4.1 EV/IC 2.3
Performance Over 1M 3M 12M Net debt (12/13E, US$ m) 1,865.8 Current WACC 8.6 Absolute (%) -8.7 -2.9 5.8 Net debt/equity (12/13E, %) 167.5 Free float (%) 94.6 BV/share (12/13E, US$) 2.5 Number of shares (m) 448.30
Relative (%) -4.8 0.5 0.2 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
Global Satellite 38 07 February 2014
Strong Maritime competitive position until 2017 The MSS market (transmission of satellite data and voice to small highly mobile terminals) is still dominated by key global players Inmarsat, Globalstar and Iridium, plus smaller regional players (such as Thuraya in Asia). These players typically offer relatively low data speeds of up to 0.5MBps over L-Band (see Appendix 3) and are currently unable to provide broadband (for the purposes of this report we define “broadband” as 10MBps+) capacity. Despite this, Inmarsat’s XpressLink Maritime product is currently taking 40-50% share of net adds in the high-speed Maritime broadband market, sourcing this broadband capacity from the high-speed broadband wholesale market. The MSS players, however, will be launching new satellites over the next 3-4 years which will allow them to offer broadband speeds over 10Mbps to small mobile terminals. Inmarsat’s GlobalXpress (GX) constellation, Intelsat’s Epic constellation and, to a lesser degree in our view, Iridium’s planned NEXT satellite constellation, will likely become more prominent players in the global provision of broadband satellite capacity over 2014-17. Iridium NEXT The launch of Iridium's new satellite constellation (NEXT) has been much anticipated since it was first announced in 2010. NEXT is both a replacement and an upgrade of Iridium's current LEO (Low Earth Orbit, 780km above earth) satellite constellation launched in the late 1990s. Iridium is a direct competitor to Inmarsat with no material overlap with the FSS operators. Iridium co-operates and bundles some of its services with FSS VSAT services. NEXT is planned to be a 66 satellite LEO constellation and the company expects it to launch over 2015-17. The satellites are manufactured by Thales Alenia Space and the primary launch vehicle is the SpaceX Falcon launcher. The NEXT project is expected to cost around $3bn with $1.8bn of the financing secured through a consortium of banks guaranteed by COFACE (France's export credit facility). Iridium expects to finance the remaining $1.2bn cost of the project through its operating cash flow. Figure 51: Iridium NEXT investment and committed investment vs. undrawn capacity under the Coface facility $ in millions, unless otherwise stated 1,600 1,400 1,200 1,000
800 us$'m 600 400 200 0 2011 2012 Q3 13 Residual Q413-2017
Payments made/future commitments NEXT Coface undrawn
Source: Company data The NEXT satellites will utilise L-band spectrum with satellite interlink over Ka-band. The use of L-band limits the speed that can be offered over the NEXT constellation, in our view, putting it at a theoretical disadvantage compared with Inmarsat's Global Xpress, O3b and
Global Satellite 39 07 February 2014
Intelsat's EPIC constellations competing for global heavy data customers. However, over L-band frequencies, the satellite signal is much more resilient against 'rain fade' than both Ku-band and Ka-band. With its current satellite fleet, Iridium has co-operated with the FSS/VSAT operators in bundling L-band services with Ku-band and Ka-band. We also see the Iridium NEXT constellation as a direct competitor to Inmarsat's handheld business. Iridium has started to sign contracts for its upcoming NEXT satellite constellation with two anchor customers signed up in, Harris Corp and Aireon. Both of these are hosted payload deals.
Figure 52: Iridium NEXT hosted payload deals Customer Service Contract size Harris Corp Hosted Payload up to $45m over 4 years during construction - service fees on top Aireon Hosted Payload $200m for the integration+launch, and close to $300m service fees (c.$20m annually) Source: Company data FSS operators not looking to increase focus on Maritime broadband, in our view The FSS operators have typically offered broadband capacity using either high-frequency Ku-Band or Ka-Band capacity, although this has been using mainly spare capacity (not used for DTH) to add capacity into the wholesale market. A few FSS operators have added Ka-band capacity recently (e.g. Eutelsat). However, we do not expect the FSS operators to use new Ka-band capacity to move more aggressively into Maritime broadband with no FSS operator having good coverage of the Pacific or Atlantic oceans. In particular, the maritime business so far has been a fairly small business for the FSS operators and a good way to utilise capacity that cannot be used for DTH TV. The Maritime VSAT market remains a relatively small market for FSS operators for the following reasons: ■ No FSS operator is able to offer VSAT on a global basis; ■ FSS coverage concentrated over land masses rather than the oceans; ■ VSAT suffers a deterioration in performance in bad weather due to the relatively high frequencies at which it operates; and ■ VSAT is typically more expensive. 2014 could see Inmarsat talking to potential US partners for spectrum lease The December 2012 FCC ruling on DISH’s S-Band spectrum could pave the way for DISH to use spectrum for mobile broadband services. We believe if DISH were to launch such a service, it could look to acquire more MSS spectrum, including that owned by Lightsquared. For the Lightsquared L-Band spectrum to be used for terrestrial use, the GPS interference issue would still need to be overcome but on a longer-term view we believe there is an opportunity for Inmarsat to look at new partnerships with US satellite/telecom operators with a 5-10 year time horizon in order to use satellite spectrum for terrestrial use. This view was stated by Inmarsat in late 2012. As a reminder Phase 2 of the original co-operation agreement with Lightsquared stated Inmarsat would receive $115m per year. The GX Broadband opportunity In Figure 57 we set out our model of the Global VSAT market which, according to Comsys, was worth around US$1.9bn at the wholesale level (only the satellite traffic portion) in 2010, excluding any retail mark-up, equipment sales and value added services. We estimate the VSAT wholesale market will be worth around $3bn by 2020. We keep our Inmarsat Global Xpress wholesale revenue estimates unchanged at $360m in 2019E (Inmarsat’s current guidance is $500m in 2019 or 5 years after launch) and $435m in 2020E. This implies Inmarsat would have a 15% share of the wholesale VSAT market by 2020, six years after the launch of Global Xpress.
Global Satellite 40 07 February 2014
Inmarsat acquires Globe Wireless for $45m On 17 December 2013, Inmarsat announced the acquisition of Globe Wireless, a leading provider of value-added maritime communications services to the shipping market. We view this as a small bolt-on acquisition of a Maritime service provider which services 6,000 ships, which makes strategic sense and boosts Inmarsat's presence in its core Maritime segment. The $45m acquisition cost is not that material and will be funded out of available liquidity.
Figure 53: Inmarsat: Q4 2014 active terminal forecasts 000s, unless otherwise stated 2011 Q4 2012 2012 Q3 2013 Q4 2013E 2013E
Maritime 186.9 188.1 188.1 189.5 189.9 189.9 Land 118.3 161.3 161.3 172.4 179.1 179.1 Aviation 13.5 15.4 15.4 16.6 16.8 16.8 Total active terminals 318.7 364.8 364.8 378.5 385.9 385.9 Source: Company data, Credit Suisse estimates
Figure 54: Q413 MSS revenue forecasts US$ in millions, unless otherwise stated Q4 2012 2012 Q3 2013 Q4 2013E 2013E
Maritime voice 18.7 79.7 17.5 17.6 71.8 Growth -13.6% -11.6% -10.7% -5.9% -9.9% Maritime data 86.6 331.5 90.1 90.6 359.3 Growth 24.7% 23.3% 5.5% 4.6% 8.4% Total Maritime 105.3 411.2 107.6 108.2 431.1 Growth 15.6% 14.6% 2.5% 2.7% 4.8% Land voice 5.1 14.3 5.6 6.0 21.1 Growth 131.3% 85.5% 51.4% 17.8% 47.7% Land data 26.8 118.1 24.6 25.7 106.7 Growth -16.8% -18.0% -19.6% -4.1% -9.6% Total Land 31.9 132.4 30.2 31.7 127.8 Growth -7.4% -12.7% -12.0% -0.6% -3.5% Aviation 27.1 100.8 27.4 27.0 110.3 Growth 11.6% 1.3% 12.8% -0.5% 9.4% Leasing 20.1 93.6 22.4 20.2 86.0 MSS revenues 184.4 738.0 187.6 187.0 755.1 Growth 3.8% 2.5% 0.5% 1.4% 2.3% Source: Company data, Credit Suisse estimates
Global Satellite 41 07 February 2014
Figure 55: Inmarsat: Q413 P&L forecasts US$ in millions, unless otherwise stated Q4 2012 2012 Q3 2013 Q4 2013E 2013E
MSS revenues 184.4 738.0 187.6 187.0 755.1 Other revenue 4.7 14.2 2.8 3.4 12.0 Lightsquared revenue 1.6 60.2 4.8 0.0 9.9 IsatPro terminal sales 5.6 23.5 3.1 4.0 19.6
Global Revenue 196.3 835.9 198.3 194.4 796.6 Growth -18.4% -12.8% -0.1% -1.0% -4.7% Core revenue (ex- 194.7 775.7 193.5 194.4 786.7 Lightsquared) Solutions revenues 208 810 188 182 750 Intercompany (77) (308) (80) (78) (306) One-off revenue in Solutions Consolidated revenue 328 1,338 307 294 1,241 Growth -9.4% -5.0% -5.8% -10.3% -7.2% Consol. revenue (ex- 326 1,278 302 294 1,231 Lightsquared)
Global EBITDA 132 597.3 146.3 133 568.3 Global EBITDA (ex-L2) 131 545.4 142 133 561.6
ISA Solutions EBITDA 19 97.1 22 19 76 One-off +ve EBITDA Consolidated EBITDA 150 694.4 168.7 146 645 YoY growth -26.0% -18.7% 3.6% -3.0% -7.2% Consolidated. EBITDA 150 643 164.0 146 638 (ex-L2/Exceptionals)
D&A Group and Other 64 255 60 63 232 Exceptionals (73) 0 (77) Consolidated EBIT -6 346 35 85 337 Net interest payable (17) (53) (5) (42) (61)
Consolidated PBT -24 294 30.3 43 277 Tax -4 68 15 3 81 Tax credit Headline tax rate 15.1% 23.0% 49.8% 7.0% 29.3%
Consolidated NI -20 226.1 15 40 195.4 (Underlying) -9.2% Number of shares 448.0 448.0 448.0 448.0 448.0 EPS (US$c) -4.5 50.5 3.4 9.0 43.6 EPS ex-Lightsquared (US$c) CAPEX 167 484 128 225 625 IHL CAPEX 455 596 Stratos CAPEX 29 29 Other CAPEX Dividend (US$c) 27.3 44.3 28.7 46.5 10.0% 5.0% FCF (132) (8) 55 (192) (140) Source: Company data, Credit Suisse estimates
Global Satellite 42
Satellite Global Figure 56: Inmarsat: Changes to forecasts & CS vs. consensus US$ in millions, unless otherwise stated 2013E 2013E 2014E 2014E 2015E 2015E 2016E 2016E 2017E 2017E New Old Δ (%) New Old Δ (%) New Old Δ (%) New Old Δ (%) New Old Δ (%) Maritime 431 432 -0.2% 448 451 -0.7% 474 479 -1.0% 493 498 -0.9% 514 519 -0.9% Land 128 133 -3.7% 129 134 -3.9% 134 138 -3.2% 139 142 -2.6% 143 146 -2.1% Aeronautical 110 110 0.0% 115 115 0.0% 119 119 0.0% 122 122 0.0% 125 125 0.0% Leasing 86 82 4.9% 78 78 0.0% 71 74 -4.7% 64 71 -9.1% 58 67 -13.3% GX revenue 0 0 10 10 0.0% 60 60 0.0% 140 140 0.0% 215 215 0.0% MSS revenues 755 757 -0.2% 780 788 -1.0% 857 870 -1.5% 958 973 -1.5% 1,056 1,072 -1.5% Growth 2.3% 2.5% -0.2pp 3.2% 4.1% -0.9pp 10.0% 10.4% -0.5pp 11.8% 11.9% -0.1pp 10.1% 10.2% 0.0pp
Global revenues 797 797 -0.1% 814 821 -0.8% 892 903 -1.3% 993 1,006 -1.3% 1,090 1,105 -1.4% Solutions revenues 750 750 0.0% 656 731 -10.3% 662 731 -9.4% 669 731 -8.5% 676 732 -7.7% Intercompany (306) (303) 1.0% (316) (315) 0.2% (347) (348) -0.2% (388) (389) -0.3% (427) (429) -0.3% Consolidated revenues 1,241 1,245 -0.3% 1,154 1,236 -6.7% 1,207 1,286 -6.1% 1,274 1,348 -5.5% 1,338 1,408 -5.0% Growth -3.7% -3.0% -0.7pp -6.3% -0.3% -6.0pp 4.6% 4.0% 0.6pp 5.5% 4.9% 0.7pp 5.1% 4.4% 0.6pp
Global EBITDA 568 567 0.3% 556 582 -4.5% 613 666 -8.0% 689 754 -8.7% 759 826 -8.1% Solutions EBITDA 76 73 4.9% 64 71 -9.6% 66 65 1.7% 67 65 2.7% 68 65 3.7% Consolidated EBITDA 645 639 0.8% 620 653 -5.0% 679 731 -7.2% 756 820 -7.8% 826 891 -7.3% EBITDA (ex-L2) 638 634 0.6% 620 653 -5.0% 679 731 -7.2% 756 820 -7.8% 826 891 -7.3%
Operating profit 415 409 1.3% 323 384 -16.0% 331 467 -29.1% 438 515 -15.0% 509 577 -11.8% PBT 354 347 1.9% 242 303 -20.1% 214 349 -38.9% 322 399 -19.2% 397 466 -14.8% Net income 273 250 9.2% 186 233 -20.1% 164 269 -38.9% 248 307 -19.2% 306 359 -14.8% NI (ex-LightSquared) 268 246 8.8% 186 233 -20.1% 164 269 -38.9% 248 307 -19.2% 306 359 -14.8% Headline EPS 0.44 0.56 -21.8% 0.42 0.52 -20.1% 0.37 0.60 -38.9% 0.55 0.69 -19.2% 0.68 0.80 -14.8% Adjusted EPS (US$) 0.59 0.56 6.2% 0.42 0.53 -21.6% 0.37 0.60 -38.9% 0.55 0.69 -19.2% 0.68 0.80 -14.8%
DPS (US$) 0.47 0.49 -4.5% 0.49 0.54 -8.9% 0.51 0.59 -13.0% 0.54 0.65 -17.0% 0.57 0.71 -20.8% Exchange rate 1.57 1.57 0.0% 1.54 1.54 0.0% 1.54 1.54 0.0% 1.54 1.54 0.0% 1.54 1.54 0.0% CAPEX 625 589 6.1% 510 390 30.8% 200 250 -20.0% 200 180 11.1% 220 170 29.4% FCF -140 -190 -26.0% -101 37 -372.2% 237 208 13.7% 291 356 -18.4% 358 458 -21.8% Net debt (end) 1,866 1,921 -2.9% 2,154 2,116 1.8% 2,140 2,164 -1.1% 2,083 2,089 -0.3% 1,970 1,940 1.6% 2013E 2013E 2014E 2014E CS Cons Δ (%) CS Cons Δ (%)
MSS revenue 755 754 0.2% 780 779 0.1% 2014 February 07 Revenue 1,241 1,255 -1.1% 1,154 1,211 -4.7% EBITDA 645 651 -1.0% 620 626 -0.9% PBT 354 309 14.5% 242 247 -2.1%
43 Source: Credit Suisse estimates, Inmarsat for consensus estimates for FY13E and FY14E only
Satellite Global Figure 57: Global wholesale VSAT market revenue model US$ in millions, unless otherwise stated Wholesale Revs (US$'m) US$'m 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Maritime VSAT 135 145 US DoD 502 643 Energy VSAT 152 168 Enterprise, Consumer, 576 944 Retail & other Total US$'m 1,365 1,900 1,995 2,137 2,266 2,357 2,452 2,551 2,654 2,761 2,872 2,988 growth y/y 5.0% 7.1% 6.1% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Inmarsat market share 0.4% 2.4% 5.5% 8.1% 10.5% 12.5% 14.6% Inmarsat revenues (us$ 10 60 140 215 290 360 435 'm)
VSAT service revenue US$'m 5,400 6,370 7,340 7,707 8,255 8,754 9,107 9,474 9,856 10,253 10,666 11,096 11,544 Wholesale margin % 25.3% 25.0% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9%
VSAT sites in service 000s 2,400 2,550 2,750 2,888 3,032 3,183 3,279 3,377 3,479 3,583 3,691 3,801 3,915 growth y/y 6.3% 7.8% 5.0% 5.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Annual service rev per site US$'m 2,250 2,498 2,669 2,696 2,723 2,750 2,777 2,805 2,833 2,862 2,890 2,919 2,948 11.0% 6.8% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Source: Inmarsat, Comsys, Credit Suisse estimates
07 February 2014 February 07
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Global Satellite 45 07 February 2014
Europe / France Wireless Telecommunication Services
Eutelsat Communications (ETL.PA) Rating (from Outperform) NEUTRAL*
Price (04 Feb 14, Eu) 22.31 Target price (Eu) 23.00¹ Market cap. (Eu m) 4,910.74 Reinstate coverage with Neutral Enterprise value (Eu m) 7,669.1
■ We reinstate coverage of Eutelsat with a Neutral rating and a target *Stock ratings are relative to the coverage universe in each price of €23 per share. We see Eutelsat as the most exposed FSS operator analyst's or each team's respective sector. to US DoD spend and oversupply in Africa, and we prefer SES among the ¹Target price is for 12 months. FSS Satellite operators. We are below consensus for Eutelsat for the first Research Analysts time in over two years. Paul Sidney 44 20 7888 6015 ■ In our view, Eutelsat does not have the required satellite capacity to sustain [email protected] high single digit revenue growth over the next six months. In July 2013, Francisco Sanches Eutelsat cut its guidance for revenue growth to above 2.5% in FY June 2014 44 20 7888 6834 [email protected] and above 5-6% for the two years ahead. This reflected 1) uncertainty from US DoD budget cuts, which impact multi-usage revenues, and 2) lack of available capacity to sustain high growth in video and data applications. ■ We adjust our estimates for less capacity available in the short term for video applications. Our forecasts for this segment were cut by ~3% for June 2014- June 2016. Nevertheless, video applications will be the main growth driver for Eutelsat from 2015 onwards, as the company has plans to increase capacity in this area. ■ We also make some adjustments for multi-usage and data revenue, to account for pressure seen in the last six months. Our multi-usage forecasts remain flat for 2014, benefiting from the integration of Eutelsat 172A in the fleet. Although we believe the worst is over for the US DoD budgetary concerns, we remain cautious on Eutelsat as it is the most exposed to these events among our European FSS operators. ■ Catalysts: 2Q FY June 2014 results, 13 February 2014. ■ Valuation: Our TP of €23 is based on a DCF valuation with 6.9% WACC and 2% terminal growth rate.
Share price performance Financial and valuation metrics
Year 06/13A 06/14E 06/15E 06/16E Revenue (Eu m) 1,284.1 1,313.9 1,391.5 1,451.1 27 EBITDA (Eu m) 995.27 996.35 1,053.34 1,109.73 22 Adjusted Net Income (Eu m) 354.9 352.6 367.7 405.3 CS adj. EPS (Eu) 1.62 1.61 1.67 1.85 17 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Prev. EPS (Eu) — 1.72 1.88 2.07 Price Price relative ROIC (%) 9.23 8.53 8.58 9.02 P/E (adj., x) 13.81 13.90 13.33 12.09 The price relative chart measures performance against the P/E rel. (%) 108.5 100.5 109.9 111.2 CAC 40 INDEX which closed at 4130.69 on 04/02/14 EV/EBITDA 7.6 7.7 7.3 6.9 On 04/02/14 the spot exchange rate was €1./Eu 1. - Eu .74/US$1 Dividend (06/14E, Eu) 1.12 IC (06/14E, Eu m) 5,013.62
Performance Over 1M 3M 12M Dividend yield (%) 5.0 EV/IC 1.5 Absolute (%) -2.1 -6.8 -11.6 Net debt (06/14E, Eu m) 2,758.4 Current WACC 6.9 Relative (%) 1.4 -4.4 -17.2 Net debt/equity (06/14E, %) 122.3 Free float (%) 89.1 BV/share (06/14E, Eu) 10.0 Number of shares (m) 220.11
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
Global Satellite 46 07 February 2014
Figure 58: Credit Suisse changes to estimates for Eutelsat Euros unless otherwise stated FY end June 2014E 2015E 2016E New Old Diff New Old Diff New Old Diff Video applications 886 917 -3.3% 953 985 -3.3% 994 1,026 -3.2% Data Services 276 282 -2.1% 295 307 -4.0% 308 320 -3.9% Multi-Usage 139 138 0.7% 137 141 -3.3% 143 144 -1.0% Other 13 8 n.m. 7 9 n.m. 7 12 n.m. Sub-total 1,314 1,345 -2.3% 1,392 1,443 -3.6% 1,451 1,502 -3.4% One off revenues 0 0 n.m. 0 0 n.m. 0 0 n.m. Revenues 1,314 1,345 -2.3% 1,392 1,443 -3.6% 1,451 1,502 -3.4%
EBITDA 996 1,039 -4.1% 1,056 1,114 -5.3% 1,116 1,172 -4.8% EBIT 643 684 -6.0% 679 746 -8.9% 751 818 -8.2% Net Income 353 377 -6.4% 369 412 -10.4% 409 455 -10.1% DPS 1.12 1.20 -6.4% 1.18 1.31 -10.4% 1.30 1.45 -10.1%
CAPEX -568 -480 18.3% -573 -456 25.8% -486 -300 61.9% Source: Credit Suisse estimates
Figure 59: Credit Suisse estimates vs. Eutelsat guidance and consensus Euros unless otherwise stated Credit Suisse estimates FY June 14 FY June 15 FY June 16 Guidance CSe Cons Guidance CSe Cons Guidance CSe Cons Revenue growth % >2.5% 3.1% 4.6% >5% 5.9% 7.0% 5% 4.3% 5.4% EBITDA margin % 77 75.8 76.8 77 75.7 76.8 77 76.5 76.8 CAPEX (€ 'm/year) 550 568 562 550 573 553 550 486 567
CSe Cons % diff CSe Cons % diff CSe Cons % diff Revenues 1,314 1,333 -1.4% 1,392 1,427 -2.5% 1,451 1,504 -3.5% EBITDA 996 1,023 -2.6% 1,056 1,096 -3.7% 1,116 1,156 -3.5% Margin (%) 75.8 76.8 75.7 76.8 76.5 76.8 643 638 0.7% 679 684 -0.7% 751 720 4.3% EBIT 353 331 6.5% 369 356 3.6% 409 382 7.1% Net Profit (Pre Except) 568 562 1.1% 573 553 3.6% 486 567 -14.4% CAPEX 1,314 1,333 -1.4% 1,392 1,427 -2.5% 1,451 1,504 -3.5% Source: Company data, Credit Suisse estimates, Thomson Reuters
Global Satellite 47 07 February 2014
Figure 60: Credit Suisse estimates for Eutelsat (fiscal year ending in June) € in millions, unless otherwise stated Revenue FY12A Q113 Q213 Q313 Q413 FY13 Q114A Q214E FY14E Video applications 832.1 216.3 214.4 216 219 866 217 219 886 Data & Value Added Services 235.0 61.1 63.8 61 67 253 66 68 276 Multi-Usage 146.4 34.1 38.6 35 37 145 37 34 139 Other 5.0 3 2.4 3 2 10 3 3 13 Sub total 1,218.6 314.5 319.2 315.2 325.4 1,274 323 325 1,314 One-off revenues 3.5 0 0 7.7 2.1 9.8 0 0 0 Total 1222.1 314.5 319.2 322.9 327.5 1284 324 325 1314 4.6% 6.5% 3.9% 4.6% 5.3% 5.1% -74.8% -84.9% -39.4% Revenue growth y-o-y Video applications 5.8% 9.1% 4.5% 2.6% 0.3% 4.0% 0.4% 2.3% 2.3% Data & Value Added Services 0.4% 2.5% 9.6% 5.0% 13.2% 7.6% 8.5% 6.9% 9.3% Multi-Usage 16.6% -5.8% 0.9% -4.3% 6.8% -0.7% 7.9% -11.7% -4.6% Other -71.0% 130.8% 17.4% -7.1% -318.2% 106.1% 0.0% 35.3% 24.1% Sub total 4.7% 6.5% 5.1% 2.1% 4.6% 4.6% 2.8% 1.8% 3.1%
Revenue share of total Video applications 68.3% 68.8% 67.2% 68.7% 67.2% 67.9% 67.2% 67.5% 67.4% Data & Value Added Services 19.3% 19.4% 20.0% 19.3% 20.6% 19.8% 20.5% 21.0% 21.0% Multi-Usage 12.0% 10.8% 12.1% 11.2% 11.5% 11.4% 11.4% 10.5% 10.6% Other 0.4% 1.0% 0.8% 0.8% 0.7% 0.8% 0.9% 1.0% 1.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company data, Credit Suisse estimates
Figure 61: DCF valuation for Eutelsat € in millions, unless otherwise stated 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E EBITDA 995 996 1,053 1,110 1,153 1,195 1,238 1,278 CAPEX Normalized (539) (539) (539) (539) (539) (539) (539) (539) Tax paid (208) (178) (186) (213) (239) (254) (271) (287) Change in working capital (26) ------Unlevered free cash flow 222 279 329 357 375 402 428 451
WACC 6.7% 7.0% 7.3% Net debt (€'m) 2,375 PV TV 5,057 4,403 4,099 WACC 6.7% 7.0% 7.3% 5,754 5,287 4,876 Equity 4,908 4,231 3,906 7,319 6,616 6,016 5,605 5,116 4,682 7,170 6,445 5,822 EV (€'m) 7,283 6,606 6,281 7,980 7,491 7,057 Terminal growth 9,545 8,820 8,197 TP (€) 1.00% 2.00% 3.00% 6.7% 22.3 25.5 32.6 WACC 7.0% 19.2 23.2 29.3 7.3% 17.7 21.3 26.5 Source: Company data, Credit Suisse estimates, NOTE: Normalized figure for CAPEX as yearly costs associated with satellite launches
Global Satellite 48 07 February 2014
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Global Satellite 49 07 February 2014
Europe / Luxembourg Wireless Telecommunication Services
SES (SESFd.PA) Rating OUTPERFORM*
Price (04 Feb 14, Eu) 24.10 Target price (Eu) 27.00¹ Market cap. (Eu m) 9,763.39 Preferred Global FSS play Enterprise value (Eu m) 14,497.3
■ We reiterate our Outperform and €27 price target on SES. In this report, *Stock ratings are relative to the coverage universe in each we make only minor adjustments to our forecasts for SES. We are broadly in analyst's or each team's respective sector. line with consensus in the short term, but we are ahead in 2015, reiterating ¹Target price is for 12 months. our view that, in the longer term, supply of satellite capacity will be exceeded Research Analysts by demand. Paul Sidney We, and consensus, are below SES guidance (3-4% revenue growth in 2013 44 20 7888 6015 [email protected] and 4.5% revenue CAGR for 2012-2014), which we believe could be revised Francisco Sanches downwards due to further launch delays. However, consensus is already 44 20 7888 6834 below guidance and, to a large extent, factoring this into their estimates. [email protected] However we are still optimistic in the mid-term for SES and see headwinds from satellite delays only affecting short-term numbers. ■ Investment case: We make only small adjustments to our forecasts for SES. SES has shown resilience in the North American region, as the least exposed to US DoD budget cuts, among European Satellite operators. Our forecasts for North American revenues are broadly unchanged. ■ We increase our estimates for the International region for FY 2013, to account for a great uptake for capacity on the SES-6 satellite, as reported in 3Q13. SES-6 has brought strong exposure to the LatAm region, where SES sees revenue growth, offsetting pressure in other regions, such as Africa. Risks to our view are limited to the short term. In our view, short-term company guidance is too high and may be reviewed for the impact of satellite delays in 2013. Nevertheless, we still see SES as our preferred stock among FSS operators, benefiting from better geographic exposure than its peers, and we expect it to outperform in the mid-term. ■ Catalysts: Due to the impact of satellite delays that affected SES over 2013, we believe that guidance for SES could be cut. FY13 results on 21 February. ■ Valuation: Our target price of €27 per share is based on a DCF valuation with 7.1% WACC, 1.7% terminal growth rate and a 10% discount. Share price performance Financial and valuation metrics
Year 12/12A 12/13E 12/14E 12/15E Revenue (Eu m) 1,828.0 1,854.5 1,981.8 2,098.3 EBITDA (Eu m) 1,346.60 1,360.88 1,455.82 1,547.33 21 Adjusted Net Income (Eu m) 648.8 551.1 618.1 688.2 CS adj. EPS (Eu) 1.60 1.36 1.53 1.70 16 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Prev. EPS (Eu) — — 1.54 1.69 Price Price relative ROIC (%) 12.28 10.61 11.80 11.98 P/E (adj., x) 15.05 17.72 15.80 14.19 The price relative chart measures performance against the P/E rel. (%) 118.2 128.1 130.2 130.5 CAC 40 INDEX which closed at 4188.1 on 04/02/14 EV/EBITDA 10.2 10.7 9.7 8.9 On 04/02/14 the spot exchange rate was €1./Eu 1. - Eu .74/US$1 Dividend (12/13E, Eu) 1.49 IC (12/13E, Eu m) 6,842.71
Performance Over 1M 3M 12M Dividend yield (%) 6.2 EV/IC 2.1 Absolute (%) 2.9 11.1 4.9 Net debt (12/13E, Eu m) 4,733.9 Current WACC 7.1 Relative (%) 5.9 15.0 -7.6 Net debt/equity (12/13E, %) 224.5 Free float (%) 57.0
BV/share (12/13E, Eu) 5.0 Number of shares (m) 405.12 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
Global Satellite 50 07 February 2014
Figure 62: Credit Suisse changes to estimates for SES € in millions, unless otherwise stated 2013E 2014E 2015E New Old Diff New Old Diff New Old Diff Revenues Europe 921 928 -0.8% 972 978 -0.6% 1,015 1,014 0.1% N America 404 405 -0.4% 410 414 -1.1% 418 423 -1.4% International 530 521 1.8% 601 601 -0.0% 665 665 0.0% Group revenues 1,854 1,855 0.0% 1,982 1,992 -0.5% 2,098 2,103 -0.2%
Cost of sales (174.3) (174.3) 0.0% (182.3) (183.3) -0.5% (188.8) (189.2) -0.2% Staff costs (185.7) (185.7) 0.0% (195.0) (195.0) 0.0% (204.8) (204.8) 0.0% Other operating expenses (133.5) (133.5) 0.0% (148.6) (149.4) -0.5% (157.4) (157.7) -0.2% OPEX (493.6) (493.6) 0.0% (526.0) (527.7) -0.3% (551.0) (551.7) -0.1% EBITDA 1,361 1,361 0.0% 1,456 1,464 -0.6% 1,547 1,551 -0.2% EBITDA margin 73.4% 73.4% 73.5% 73.5% 73.7% 73.8%
D&A (526.7) (527.9) -0.2% (535.1) (537.9) -0.5% (556.1) (557.2) -0.2% Operating profit 834.2 833.0 0.1% 920.7 926.6 -0.6% 991.3 993.8 -0.3% Net financing charge (172) (173) -1.0% -157 -162 -2.9% (140) (146) -4.4% Income tax expense (86) (85) 0.9% (95) (96) -0.2% (153) (153) 0.5% Profit after tax 576 574 0.4% 668 669 -0.2% 698 695 0.5% Associates (25.0) (25.0) (50.0) (45.0) (10.0) (10.0) NCI -0.3 -0.3 0.0 0.0 0.0 0.0 Net profit (to equity holders) 551 549 0.4% 618 624 -1.0% 688 685 0.5% Source: Credit Suisse estimates
Figure 63: SES Income statement and Credit Suisse forecasts € in millions, unless otherwise stated 2011 2012 Q113 Q213 Q313A Q413E 2013E 2014E 2015E Revenues Europe 955 923 226 229 228 238 921 972 1,015 growth y/y -3.3% -5.9% 0.6% 3.4% 1.3% -0.3% 5.5% 4.5% N America 367 422 95 108 101 100 404 410 418 growth y/y 14.9% -0.1% 11.2% -18.8% -5.7% -4.4% 1.5% 2.0% International 411 483 120 133 139 138 530 601 665 growth y/y 17.5% 4.3% 13.4% 12.9% 8.6% 9.8% 13.3% 10.8% Group reported revenues 1,733 1,828 441 470 468 476 1,854 1,982 2,098 Growth -0.1% 5.5% -2.1% 6.3% 0.0% 1.7% 1.4% 6.9% 5.9%
OPEX (458.5) (481.4) (119.6) (128.9) (120.4) (124.7) (493.6) (526.0) (551.0) change y/y 19.2 22.9 6.7 15.0 (0.4) (9.1) (12.2) (32.4) (25.0)
EBITDA 1,275 1,347 321 341 347 352 1,361 1,456 1,547 EBITDA margin 73.5% 73.7% 74.0% 72.6% 74.3% 73.8% 73.4% 73.5% 73.7%
D&A (466.4) (556.1) (124.0) (129.4) (129.0) (144.3) (526.7) (535.1) (556.1) Operating profit 808.2 790.5 197.2 211.4 218.3 207.3 834.2 920.7 991.3 Net financing charge (158.5) (170) (29.5) (53.0) (44.9) (44) (172) (157) (140) Income tax expense (16.0) 42 (21.3) (24.0) (21.3) (19) (86) (95) (153) Associates (8.4) (14.0) (4.6) (7.7) (6.7) (6.0) (25.0) (50.0) (10.0) Non-controlling interests (7.6) (0.3) (0.3) (0.2) -0.3 0.0 0.0 Net profit 617.7 649 142 127 145 137 551 618 688 growth y/y 26.8% 5.0% -6.4% -14.1% -7.8% -28.6% -15.1% 12.2% 11.3% Source: Company data, Credit Suisse estimates
Global Satellite 51 07 February 2014
Figure 64: Credit Suisse vs. consensus estimates for SES € in millions, unless otherwise stated 2013E 2014E 2015E C Suisse Cons % diff C Suisse Cons % diff C Suisse Cons % diff Revenue 1,854 1,866 -0.6% 1,982 1,993 -0.6% 2,098 2,072 1.3% EBITDA 1,361 1,368 -0.5% 1,456 1,469 -0.9% 1,547 1,529 1.2% Margin 73.4% 73.3% 73.5% 73.7% 73.7% 73.8% EBIT 834 851 -1.9% 921 918 0.3% 991 983 0.9% NI 551 573 -3.9% 618 615 0.6% 688 686 0.3% Source: Credit Suisse estimates, Thomson Reuters
Exhibit 65: Credit Suisse vs. SES guidance € in millions, unless otherwise stated Credit Suisse SES Guidance Difference Revenues 2013e growth % 2.3% 3-4% -0.7/-1.7pp 2012-2014e cagr % 3.4% 4.5% -1.10pp
EBITDA 2013e growth% 2.0% 2.5-3.5% -0.5/-1.5pp 2012-2014e cagr% 3.2% 4.5% 1.3pp Source: Company data, Credit Suisse estimates, NOTE: All figures are on a constant currency basis
Exhibit 66: Target price calculation for SES 3 yr DCF SES 2013E 2014E 2015E EBITDA 1,361 1,400 1,547 CAPEX (516) (454) (440) Tax paid (86) (91) (153) Change in working capital 10 10 10 Unlevered free cash flow 769 866 964 WACC 6.8% 7.1% 7.4% EV 16,344 15,425 14,600 PV TV 14,073 13,166 12,355 16,899 15,915 15,036 14,628 13,657 12,790 21,941 20,276 18,840 19,670 18,017 16,594 2013E Net debt 3,814
Price per sahre without discount Our adopted price with 10% discount WACC Terminal growth WACC 1.5% 1.7% 3.0% Discount 6.8% 7.1% 7.4% 6.8% 30.9 32.3 44.7 15% 27.5 25.4 23.5 7.1% 28.7 29.9 40.6 10% 29.1 26.9 24.9 7.4% 26.6 27.7 37.1 20% 25.8 23.9 22.2 Source: Credit Suisse estimates
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Global Satellite 53 07 February 2014
Asia Pacific / Australia Alternative Carriers (Telecommunications - SMID (AU))
NewSat Limited (NWT.AX / NWT AU) Rating OUTPERFORM* [V]
Price (05 Feb 14, A$) 0.46 Target price (A$) (from 0.69) 0.74¹ Reiterate Outperform rating Market cap. (A$mn) 269.11 Yr avg. mthly trading (A$mn) 10 ■ NewSat is an Australian Teleport operator supplying secure satellite data Last month's trading (A$mn) 23 and communications services to government, enterprise and telecoms Projected return: Capital gain (%) 62.6 customers in remote locations, primarily around Australia, PNG and Timor Dividend yield (net %) — Leste. Services are delivered via NWT's two Australian teleports (Adelaide Total return (%) 62.6 and Perth) which uplink to 13 third-party geostationary satellites. We have 52-week price range 0.57 - 0.34 upgraded EBITDA FY15 to FY17 by 3% to 8% to predominantly reflect a lower assumed long term AUD:USD (0.85 from 0.90). Our FY14 Teleport * Stock ratings are relative to the relevant country benchmark. forecasts decline to reflect weaker Teleport sales over the past 12 months. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). ■ NWT has rights to 8 orbital slots and is funded to launch its first
Research Analysts satellite, Jabiru-1, in mid-2015. NWT owns rights to eight orbital slots Bradley Clibborn which underpins its plans to become a vertically integrated satellite operator. 61 2 8205 4465 Its first Satellite, Jabiru-1 (J-1), will carry 210TPE of Ka-Band capacity and [email protected] 18TPE of Ku/S-band capacity over high growth regions of the Middle East, Africa and Asia. J-1 capex is expected to be ~US$611mn and has been funded via a $108mn equity raising (Feb-13), US$399mn of ECA debt and US$30m Mezzanine debt. ■ Significant upside in NWT. Share price implies an overly bearish J-1 result: The current NWT share price implies that J-1 utilisation only reaches 60% and price is discounted 15% below spot. We think this is overly bearish given NWT has already pre-sold 46% of Year 1–3 capacity and that we expect demand growth to be 4.5%–9% p.a. to 2016 in J-1 regions. ■ Catalysts: Pre-sales contracts over the next 18 months and finalization of ECA funding. ■ Our 12-month forward base case DCF of $0.87ps suggests ~90% potential upside employing a conservative 1.50 equity beta (13.75% Ke). Our $0.74ps TP is a risk weighting of six scenarios. Our more optimistic valuation is $1.19ps.
Share price performance Financial and valuation metrics
Year 06/13A 06/14E 06/15E 06/16E Price (LHS) Rebased Rel (RHS) Revenue (A$mn) 39.2 38.1 52.6 155.1 2 EBITDA (A$mn) 3.4 0.0 7.9 60.8 1.5 140 EBIT (A$mn) 1.8 -1.2 6.6 18.3 1 90 0.5 Net income (A$mn) 1.8 -0.2 5.2 8.3 0 40 EPS (CS adj.) (Ac) 0.48 -0.02 0.74 1.18 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Change from previous EPS (%) n.a. n.m 2.0 90.1 The price relative chart measures performance against the S&P Consensus EPS (Ac) n.a. 0.40 2.60 5.10 ASX 200 Index which closed at 5070.31 on 05/02/14 EPS growth (%) -50.5 -105.0 3,183.8 60.3 On 05/02/14 the spot exchange rate was A$1.12/US$1 P/E (x) 94.5 -1,904.0 61.7 38.5
Dividend (Ac) — — — — Performance Over 1M 3M 12M Dividend yield (%) — — — — Absolute (%) 2.2 4.6 -12.5 P/B (x) 0.8 1.4 1.4 1.4
Relative (%) 4.5 8.1 -24.3 Net debt/equity (%) net cash 54.7 202.2 190.1
Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency
Global Satellite 54 07 February 2014
Figure 67: Financial Summary
NewSat Limited (NWT) 2012 2013 2014 Year2015 ending 302016 Jun 2012 2013 In AUDmn,2014 unless 2015otherwise stated2016 Share Price: A$0.46 4/02/2014 13:57 Earnings 06/12A 06/13A 06/14E 06/15E 06/16E Rating OUTPERFORM c_EPS_SHARESEquiv. FPO (period avg.) mn 232.4 379.7 676.3 703.5 705.5 Target Price A$ 0.74 c_EPS*100EPS (Normalised) c 1.0 0.5 0.0 0.7 1.2 vs Share price % 61.88 EPS_GROWTH*100EPS Growth % -50.5 -105.0 3,183.8 60.3 DCF A$ 0.87 c_EBITDA_MARGIN*100EBITDA Margin % 10.2 8.6 0.1 14.9 39.2 NewSat Limited (NewSat) is an Australia-based specialist satellite communications company, c_DPS*100DPS c 0.0 0.0 0.0 0.0 0.0 delivering Internet, voice, data and video communications via satellite. c_PAYOUT*100Payout % 0.0 0.0 0.0 0.0 0.0 FRANKING*100Franking % 100.0 100.0 100.0 100.0 100.0 c_FCF_PS*100Free CFPS c -14.4 -6.3 -33.3 -47.7 5.9 Profit & Loss 06/12A 06/13A 06/14E 06/15E 06/16E c_TAX_RATE*100Effective tax rate % 0.0 0.0 30.0 30.0 30.0 Sales revenue 37.2 39.2 38.1 52.6 155.1 Valuation EBITDA 3.8 3.4 0.0 7.9 60.8 c_PE P/E x 47.0 94.9 -1,912.4 62.0 38.7 Depr. & Amort. (1.6) (1.6) (1.2) (1.3) (42.5) c_EBIT_MULTIPLE_CURREV/EBIT x 126.3 108.1 -333.2 111.0 38.4 EBIT 2.2 1.8 (1.2) 6.6 18.3 c_EBITDA_MULTIPLE_CUEV/EBITDA x 72.8 56.2 8,294.7 93.2 11.5 Associates 0.0 0.0 0.0 0.0 0.0 c_DIV_YIELD*100Dividend Yield % 0.0 0.0 0.0 0.0 0.0 Net interest Exp. 0.1 0.1 1.0 0.8 (6.3) c_FCF_YIELD*100FCF Yield % -31.4 -13.7 -72.8 -104.4 12.9 Other 0.0 0.0 0.0 0.0 0.0 c_PB Price to Book x 1.7 0.8 1.4 1.4 1.4 Profit before tax 2.3 1.8 (0.2) 7.4 11.9 Returns Income tax (0.0) (0.0) 0.1 (2.2) (3.6) c_ROE*100Return on Equity % 3.6 0.9 -0.1 2.3 3.7 Profit after tax 2.3 1.8 (0.2) 5.2 8.3 c_I_NPAT/c_I_SALES*100Profit Margin % 6.1 4.7 -0.4 9.9 5.4 Minorities 0.0 0.0 0.0 0.0 0.0 c_I_SALES/c_B_TOT_ASSAsset Turnover x 0.4 0.2 0.1 0.1 0.2 Preferred dividends 0.0 0.0 0.0 0.0 0.0 c_ASSETS/c_EQ_COMMONEquity Multiplier x 1.4 1.2 2.0 3.4 3.3 Associates & Other 0.0 0.0 0.0 0.0 0.0 c_ROA*100Return on Assets % 2.6 0.7 0.0 0.7 1.1 Normalised NPAT 2.3 1.8 (0.2) 5.2 8.3 c_ROIC*100Return on Invested Cap. % 3.2 1.4 -0.2 0.7 1.9 Unusual item after tax 0.0 8.6 0.0 0.0 0.0 Gearing Reported NPAT 2.3 10.4 (0.2) 5.2 8.3 c_GEARING*100Net Debt to Net debt + Equity % 8.5 Net Cash 35.4 66.9 65.5 c_NET_DEBT/c_I_EBITDANet Debt to EBITDA x 1.5 Net Cash 2,607.3 58.8 7.1 Balance Sheet 06/12A 06/13A 06/14E 06/15E 06/16E c_I_EBITDA/Int Cover c_I_NET_INTEREST (EBITDA/Net Int.) x -51.2 -44.3 0.0 -9.8 9.6 Cash & equivalents 3.8 112.8 87.4 59.3 59.2 c_I_EBIT/Int Cover c_I_NET_INTEREST (EBIT/Net Int.) x -29.5 -23.1 1.2 -8.2 2.9 Inventories 0.5 0.5 0.6 0.6 1.7 (c_C_CAPEX/c_I_SALES)*-100Capex to Sales % 103.0 77.1 581.1 650.3 3.0 Receivables 6.3 4.7 6.1 8.4 35.3 (c_C_CAPEX/c_I_DEPR)*-100Capex to Depreciation % 2,380.6 1,876.6 17,996.2 27,175.9 10.9 Other current assets 3.9 6.7 6.7 6.7 6.7 Current assets 14.5 124.7 100.7 75.0 102.8 MSCI IVA (ESG) Rating Credit Suisse View Property, plant & equip. 6.2 7.5 7.4 7.7 511.9 TP ESG Risk (%): -2.5 Intangibles 65.7 125.9 346.2 686.8 144.7 TP Risk Comment: We include 2.5% discount for ESG risks Other non-current assets 0.0 0.0 0.0 0.0 0.0 7.7 associated with the types of countries NWT operates in and risks associated with dealing with government clients Non-current assets 71.9 133.4 353.6 694.5 656.7 6.7 Total assets 86.3 258.0 454.3 769.6 759.5 Payables 7.6 12.3 9.1 10.1 23.8 5.7 Interest bearing debt 9.5 31.8 211.3 521.8 490.6 4.7 Other liabilities 7.2 7.5 7.4 8.8 18.2 MSCI IVA Risk: Total liabilities 24.4 51.6 227.8 540.7 532.6 3.7 MSCI IVA Risk Comment: Net assets 61.9 206.4 226.5 228.8 226.9 2.7 Ordinary equity 61.9 206.4 226.5 228.8 226.9 Environment Social Governance Minority interests 0.0 0.0 0.0 0.0 0.0 Stock Local Sector Preferred capital 0.0 0.0 0.0 0.0 0.0 Country Global Sector Total shareholder funds 61.9 206.4 226.5 228.8 226.9 Net debt 5.8 -81.0 123.9 462.6 431.4 Source: MSCI ESG Research
Cashflow 06/12A 06/13A 06/14E 06/15E 06/16E Share Price Performance EBIT 2.2 1.8 -1.2 6.6 18.3 0.70 Net interest 0.0 0.0 0.0 0.0 -7.0 Depr & Amort 3.8 3.4 0.0 7.9 60.8 0.60 Tax paid 0.0 0.0 -0.1 -0.8 5.8 0.50 Working capital 4.8 6.4 -4.6 6.4 46.7 Other -5.9 -5.0 2.1 -13.7 -78.4 0.40 Operating cashflow 4.9 6.5 -3.7 6.4 46.1 Capex -38.3 -30.2 -221.5 -342.2 -4.7 0.30 Capex - expansionary Capex - maintenance 0.20 Acquisitions & Invest Asset sale proceeds 0.0 0.0 0.0 0.0 0.0 0.10 Other 0.0 0.0 0.0 0.0 0.0 0.00 Investing cashflow -38.3 -30.2 -221.5 -342.2 -4.7 23/01/2013 23/03/2013 23/05/2013 23/07/2013 23/09/2013 23/11/2013 23/01/2014 Dividends paid 0.0 0.0 0.0 0.0 0.0 Equity raised 28.8 96.9 6.4 0.0 0.0 NWT.AX XJO Net borrowings 5.8 32.7 177.5 303.9 -18.9 Other -3.0 -9.2 0.0 0.0 -24.7 1 Month 3 Month 12 Month Financing cashflow 31.6 120.4 183.9 303.9 -43.5 Absolute 1.6% 5.1% -12.1% Total cashflow -1.8 96.7 -41.2 -31.8 -2.0 Relative 4.6% 9.6% -17.8% Adjustments 0.0 12.3 15.8 3.7 2.0 Net change in cash -1.8 109.0 -25.4 -28.1 0.0 Source: Reuters 52 week trading range: 0.34-0.57 Source: Company data, Credit Suisse estimates
Global Satellite 55 07 February 2014
NewSat and Jabiru update Below we provide an update on NewSat since our last report dated Jul-2013 NWT expected to draw on ECA funds Jan-2014 following Malaysian approval for S- band payload: On 30 -December- 2013, MEASAT confirmed that it had received a confirmation letter from the Malaysian Communications and Multimedia Commission (MCMC) allowing NewSat's Jabiru-1 (J-1) satellite to be launched in MEASAT's 91.5E orbital slot. The confirmation letter from MCMC was the final condition precedent outstanding from any party other than for the ECA (Export Credit Agency) lenders or NewSat. We therefore expect to see documents relating to the ECA loans finalised in February 2014 with draw down of funds thereafter to make progress payments to Lockheed Martin who is constructing the Jabiru-1 satellite. We understand Lockheed has continued working on the Satellite over the past six months while waiting finalisation of ECA documentation. Satellite completion is anticipated for 2015 with launch mid-2015. Our model continues to assume a Sep-2015 launch for conservatism with revenue contribution from mid Nov-15. One new contract announced for Jabiru-1 over the last six 6months. FY15 will be much busier year for J-1 contract announcements: On 9 -January -2014, NWT announced a new US$160mn contract for Jabiru-1 capacity with a South West Asian Telco for capacity over Pakistan, Afghanistan and the Middle East over a 15- year term. This contract replaces a US$134mn contract previously agreed with the customer (US$26mn uplift) and brings total pre-launch contracts signed on J-1 to US$644mn (just under 47% of year 1-3 capacity). We believe the delay to ECA financial close may have impacted on NWT's ability to sign pre-launch contracts over the past six months. Further, launch is still ~18 months away, which attracts a large discount to any deals signed. As we move into FY15 (within 12 months of launch) we expect to see a number of contract announcements and the discounts given to customers narrow. Contract announcements will be a key catalyst in FY15. Jabiru-2 (MEASAT 3B satellite) due for launch in March -2014: NewSat is launching a 6TPE Ka band payload (Jabiru-2) on the MEASAT 3B satellite. According to Satlaunch.net the satellite is on track for a March -2014 launch date. We are assuming revenue contribution to NWT from sale of the capacity from 1 -July -2014. We would expect to see contract announcements relating to sale of this capacity over the next 3-4 months. Over the past six months (1H14), NWT has announced ~$6.1mn of satellite contracts for its Teleports business. We have incorporated this into our forecasts. Pricing dynamics for Satellite "data" services over Jabiru-1 key regions steady: Earlier in this industry report, we highlighted risks to pricing in Africa and the Middle East from slowing demand and oversupply of capacity. Recent company comments have suggested that the pricing pressure is more specifically related to the consumer broadband market where NewSat does not compete. Pricing of capacity for use in corporate/government/telco '"data'" services (where NWT is operating) have been steady over the past 6six months. We also note that where, and if, / if pricing risks do arise, the Jabiru-1 satellite has been designed to be able to reallocate capacity into different regions. Model review / earnings update We have upgraded our NWT EBITDA forecasts for FY15EE to FY17 by 3% - 11%. Our forecasts for FY14 have been downgraded. Key assumptions changes are:
■ FY14 downgraded to reflect slower than expected Teleport sales: While the NWT Teleport business is only a very small contributor to NPV, it is the driver of its current earnings. New contracts announced for 1H14 are worth $6.1mn, marginally above $4.7mn in 2H13, however below our expectations. We have reduced 1H14E and 2H14E sales to $6.3mn and $7.5mn respectively which results in a 23% downgrade to our Teleport revenue forecasts.
Global Satellite 56 07 February 2014
Earnings Changes FY14e FY15e FY16e FY17e Old New %chg Old New %chg Old New %chg Old New %chg Sale of Goods 1.9 1.8 -8.2% 2.2 2.5 11.2% 2.2 2.6 16.9% 2.3 2.8 22.9% Rendering of services 47.6 36.3 -23.7% 54.2 50.2 -7.5% 55.0 53.5 -2.8% 55.8 57.0 2.2% Total sales income 49.5 38.1 -23.1% 56.4 52.6 -6.8% 150.4 155.1 3.2% 230.7 243.4 5.5%
Cost of Sales -29.9 -24.6 -17.6% -31.5 -30.0 -5.0% -76.2 -77.0 1.1% -78.4 -81.8 4.3% Gross Profit 19.7 13.5 -31.4% 24.9 22.7 -9.0% 74.2 78.2 5.4% 152.3 161.6 6.1%
Operating Costs -15.7 -13.4 -14.5% -17.3 -14.8 -14.4% -19.4 -17.4 -10.6% -21.3 -19.7 -7.6% EBITDA 3.9 0.0 -98.8% 7.6 7.9 3.3% 54.7 60.8 11.0% 131.0 141.9 8.4%
Depreciation and amort 1.5 1.2 -18.6% 1.5 1.3 -17.8% 42.8 42.5 -0.6% 44.3 44.0 -0.6% EBIT 2.4 -1.2 -149.1% 6.1 6.6 8.6% 12.0 18.3 52.4% 86.7 97.9 12.9%
Net Interest expense -1.1 -1.0 -17.0% -0.7 -0.8 12.2% 6.1 6.3 4.0% 11.1 11.5 4.2% Tax expense 1.1 -0.1 -106.5% 2.0 2.2 9.0% 1.8 3.6 102.9% 22.7 25.9 14.2% ...Effective tax rate (%) 30% 30% 30% 30% 30% 30% 30% 30% Normalised NPAT 2.5 -0.2 -106.5% 4.8 5.2 9.0% 4.1 8.3 102.9% 52.9 60.4 14.2%
EPS (cps) 0.4 0.0 -106.3% 0.7 0.7 2.0% 0.6 1.2 90.1% 8.0 8.5 7.1%
Cash Flow Operating Cash Flow 4.9 -3.7 -175.1% 6.0 6.4 7.7% 42.3 46.1 9.2% 96.9 104.4 7.7% Capex - Total 222.4 221.5 -0.4% 222.6 342.2 53.7% 4.5 4.7 3.2% 6.9 7.3 5.5% …PP&E 1.5 1.1 -23.1% 1.7 1.6 -6.8% 4.5 4.7 3.2% 6.9 7.3 5.5% …Project Development 220.9 220.3 -0.3% 220.9 340.6 54.2% 0.0 0.0 0.0 0.0 Free Cash Flow -217.5 -225.1 3.5% -216.6 -335.8 55.0% 37.7 41.5 9.9% 90.0 97.1 7.8% Cash 81.8 87.4 6.9% 42.4 59.3 39.8% 42.1 59.2 40.6% 36.9 49.8 34.9% Net Debt 228.8 123.9 -45.9% 459.8 462.6 0.6% 421.2 431.4 2.4% 331.2 334.3 0.9% Source: Company data, Credit Suisse estimates
■ Our Teleport assumptions from FY15 and beyond are largely unchanged. The launch of Jabiru-2 in March -2014 will give NWT access to capacity at rates well below (~25%) what it is currently paying to third-party satellites for Teleport capacity. We believe this new capacity will allow NWT to win new business offering a discounted price, while driving a material volume uplift (Jabiru-2 adds ~38% to NWT's Teleport capacity).
■ AUD:USD assumptions reduced with Credit Suisse house forecasts for FY14 and FY15: We have revised our FX assumptions for the AUD;USD. Given that Jabiru- 1 contracts and revenues are based in US dollars (as are satellite construction costs and ECA debt) currency has a meaningful impact on our NWT forecasts. We now assume a long term AUD/USD of 0.85 from December 2015-15 onwards (0.90 previously). This drives an 11% EBITDA upgrade in FY16E and an 8% EBITDA upgrade in FY17E.
■ Capex timing delayed to reflect draw down of ECA funding: Our prior forecasts (set before the FY13 result) had assumed a much higher capex funding in FY13 (actual FY13 cash capex was ~$30mn vs. our forecast of $123mn). The delayed capex now lands in FY15 given the ECA funding is only expected to be drawn from January 20-114.
■ Core Jabiru-1 assumptions left unchanged: Our core assumptions for Jairu-1 have been left unchanged. This includes 60% utilisation from pre sales, and we expect utilisation to reach 80% three years after launch. We also assume pre-sales Ka band capacity is priced at US$1mn/TPE/p.a. for the first five years before resetting to a market price of ~US$1.3mn/TPE/p.a., and Jabiru-1 EBTIDA margins at 75%-80%.
Global Satellite 57 07 February 2014
Figure 68: Earnings changes for NWT
Earnings Changes FY14e FY15e FY16e FY17e Old New %chg Old New %chg Old New %chg Old New %chg Sale of Goods 1.9 1.8 -8.2% 2.2 2.5 11.2% 2.2 2.6 16.9% 2.3 2.8 22.9% Rendering of services 47.6 36.3 -23.7% 54.2 50.2 -7.5% 55.0 53.5 -2.8% 55.8 57.0 2.2% Total sales income 49.5 38.1 -23.1% 56.4 52.6 -6.8% 150.4 155.1 3.2% 230.7 243.4 5.5%
Cost of Sales -29.9 -24.6 -17.6% -31.5 -30.0 -5.0% -76.2 -77.0 1.1% -78.4 -81.8 4.3% Gross Profit 19.7 13.5 -31.4% 24.9 22.7 -9.0% 74.2 78.2 5.4% 152.3 161.6 6.1%
Operating Costs -15.7 -13.4 -14.5% -17.3 -14.8 -14.4% -19.4 -17.4 -10.6% -21.3 -19.7 -7.6% EBITDA 3.9 0.0 -98.8% 7.6 7.9 3.3% 54.7 60.8 11.0% 131.0 141.9 8.4%
Depreciation and amort 1.5 1.2 -18.6% 1.5 1.3 -17.8% 42.8 42.5 -0.6% 44.3 44.0 -0.6% EBIT 2.4 -1.2 -149.1% 6.1 6.6 8.6% 12.0 18.3 52.4% 86.7 97.9 12.9%
Net Interest expense -1.1 -1.0 -17.0% -0.7 -0.8 12.2% 6.1 6.3 4.0% 11.1 11.5 4.2% Tax expense 1.1 -0.1 -106.5% 2.0 2.2 9.0% 1.8 3.6 102.9% 22.7 25.9 14.2% ...Effective tax rate (%) 30% 30% 30% 30% 30% 30% 30% 30% Normalised NPAT 2.5 -0.2 -106.5% 4.8 5.2 9.0% 4.1 8.3 102.9% 52.9 60.4 14.2%
EPS (cps) 0.4 0.0 -106.3% 0.7 0.7 2.0% 0.6 1.2 90.1% 8.0 8.5 7.1%
Cash Flow Operating Cash Flow 4.9 -3.7 -175.1% 6.0 6.4 7.7% 42.3 46.1 9.2% 96.9 104.4 7.7% Capex - Total 222.4 221.5 -0.4% 222.6 342.2 53.7% 4.5 4.7 3.2% 6.9 7.3 5.5% …PP&E 1.5 1.1 -23.1% 1.7 1.6 -6.8% 4.5 4.7 3.2% 6.9 7.3 5.5% …Project Development 220.9 220.3 -0.3% 220.9 340.6 54.2% 0.0 0.0 0.0 0.0 Free Cash Flow -217.5 -225.1 3.5% -216.6 -335.8 55.0% 37.7 41.5 9.9% 90.0 97.1 7.8% Cash 81.8 87.4 6.9% 42.4 59.3 39.8% 42.1 59.2 40.6% 36.9 49.8 34.9% Net Debt 228.8 123.9 -45.9% 459.8 462.6 0.6% 421.2 431.4 2.4% 331.2 334.3 0.9% Source: Company data, Credit Suisse estimates
NewSat—Valuation and investment view Our core DCF valuation of NWT has increased to $0.87ps from $0.80ps (13.75% Ke with a 1.50 equity beta 1.50): We have taken a conservative view on our NWT cost of capital employing an equity beta of 1.50, materially above peers ranging from 0.60–1.20. Our beta is set to ensure our target NWT EV/EBITDA in the early years of Jabiru-1 operation is consistent with peers at 7x–8x. However Jabiru-1 will have a much higher EBITDA growth rate than peers in its first five years of operation as utilisation ramps up and discounted pre-sales contracts roll off. We therefore view our 1.50 equity beta as very conservative. Our core valuation using this 1.50 equity beta (13.75% cost of equity) and an equity cash flow DCF is $0.87ps.
■ Key assumptions underpinning our core DCF: We assume pre-sales of 60% at a 25%–30% discount to spot (US$1mn/TPE/p.a.) with an average contract life of 5.5 years. We assume three years to reach 80% utilisation and spot pricing of US$1.3mn/TPE/p.a. with 0.5% p.a. price inflation. Our opex of ~$220k/TPE/p.a. with our pricing assumptions leads to EBITDA margins ranging from 70%–79% for the Jabiru-1 project. We note this valuation is a 12-month forward DCF and rises to $1.02ps by the time of launch (on a 12-month forward basis).
■ Our core DCF valuation has increased to $0.87ps from $0.80ps reflecting 1) DCF roll forward of +5cps; 2) Long- term AUD/USD assumption reduced to 0.85 from 0.90 adding +7cps; 3) Delays to capex timing adds +1cps; and 4) -6cps dilution impact from October 2013 issue of 13mn shares to Orbital in addition to other dilutive instruments issued over the last six months.
Global Satellite 58 07 February 2014
Our more optimistic NWT valuation is $1.19ps but still includes no upside for the Jabiru 3 or 4 projects: Our more bullish case adopts slightly higher spot pricing (US$1.4mn/TPE/p.a.) leading to 75%–80% EBITDA margins. We also reduce our equity beta to 1.20 under this scenario in line with the upper end of peers. We still include no upside for Jabiru 3 or 4 satellites. These more optimistic valuation assumptions lead us to a $1.19ps valuation on a 12-month forward basis. Rolling forward to launch date would see this more optimistic valuation increase to $1.44ps. Downside scenario with discounted pricing to fill Jabiru-1 is valued at $0.60ps: We have run four downside cases. The most likely of the downside cases in our view is that NWT has to discount pricing to get Jabiru-1 sales away. Under this scenario, we assume long-term pricing of US$1mn/TPE/p.a. which is 25% below our US$1.3mn/TPE/p.a. base case spot pricing. We assume utilisation still reaches 80% three years after launch, however EBITDA margins only reach 73%. This leads to our $0.60ps valuation (equity beta 1.50ps). Probability of launch failure very low using Ariane5 launch vehicle. However this is the most bearish scenario: Using the Ariane5 launcher, we believe launch failure risk is <2%. However, in this unlikely (in our view) event, we expect launch insurance to cover the ECA lenders and standby facility (up to US$425mn). This still leaves the business with $30mn of mezzanine debt and a number of dilutive warrants in place that dilute the remaining value of the Teleports business. For this scenario, we assume re-launch is not attempted as it would require additional equity. We have not included a value on the eight orbital slots. We value this scenario at $0.01ps. We believe M&A places a floor under NWT value in the event that NWT is not successful in filling the satellite: Earlier in this Industry report, we highlight consolidation in the satellite sector as being likely to continue. With Jabiru-1 located in an attractive high growth region, we believe M&A activity from the larger operators provides a floor value under NWT in the event that NWT is struggling to fill capacity. Target price upgrade to $0.74 from $0.69. Our target price upgrade is consistent with the upgrade to our core DCF valuation as discussed above. We set our NWT target price using six valuation scenarios (four of which have been discussed above). We apply a 70% probability to our base case valuation, 5% to our bull case and a very conservative 25% to our range of bear case scenarios (see Figure 69). We believe as NWT moves closer to launch with more omitted pre-sales the investment case will de-risk resulting in modification to the risk weighting of our various scenarios. Maintain OUTPERFORM rating: Significant upside in NWT. Share price implies an overly bearish J-1 result: The current NWT share price implies that J-1 utilisation only reaches 60% and price is discounted 15% –below spot. We think this is overly bearish given NWT has already pre-sold 46% of Year 1–3 capacity and that we expect demand growth is expected to be 4.5%–9% p.a. to 2016E in J-1 regions. Our 12-month forward base case DCF of $0.87ps suggests ~78% potential upside employing a conservative 1.50 equity beta (13.75% Ke). Our $0.74ps TP is a risk weighting of six scenarios. Our more optimistic 12-month forward valuation is $1.19ps and still ignores upside for satellites beyond J-1.
Global Satellite 59 07 February 2014
Figure 69: Credit Suisse risk weighted target price for NWT Equity Shares A$ per Risk Weighted Target Price (12mth fwd) Notes A$m (mn) share Weight
Teleports & Corp O'head (ex Cash) 34.0 Jabiru 1 582.3 Jabiru 1 replaced in 2030 for $710m ($35m NPV) Base Case. Succesful launch 616.3 706.8 0.87 70.0% Spot US$1.3m/TPE @ 80% Fill 70%-76% EBITDA.
Teleports & Corp O'head (ex Cash) 34.0 Jabiru 1 804.4 Jabiru 1 replaced in 2030 for $710m ($35m NPV) Jabiru 3 & 4 Bull Case. Successful Launch (beta reduced to 1.2)838.4 706.8 1.19 5.0% Spot US$1.4m/TPE @ 80% Fill 75%-80% EBITDA.
Teleports & Corp O'head (ex Cash) 34.0 Jabiru 1 382.1 Jabiru 1 replaced not replaced in 2030 Value of Orbital slots & Jabiru Ground Equipment Bear Case 1. High utilisation but low price 416.1 689.3 0.60 7.5% Spot US$1m/TPE @ 80% Fill. 73% EBITDA.
Teleports & Corp O'head (ex Cash) 34.0 Jabiru 1 250.5 Jabiru 1 replaced not replaced in 2030 Value of Orbital slots & Jabiru Ground Equipment Bear Case 1. Low utilisation and low price 284.5 722.4 0.39 7.5% Spot US$1m/TPE @ 60% Fill. 65% EBITDA.
Teleports & Corp O'head (ex Cash) 34.0 Jabiru 1 164.3 Sale @ 150% of book value in 2H17 + Cash - Debt Value of Orbital slots & Jabiru Ground Equipment Bear Case 2. Launch but cant sell capacity. 198.3 722.4 0.27 5.0% Asset sale at $2.4m/TPE well below other M&A
Teleports & Corp O'head (ex Cash) 34.0 Jabiru 1 -26.6 Jabiru 1 Insurance proceeds + Cash - Debt (NPV) Value of Orbital slots & Jabiru Ground Equipment Bear case 3. Launch failure 7.4 722.4 0.01 5.0% Launch failure and no re-attempt
ESG risk for area of operation & exposure to govt (-2.5%) -0.02 Probability Weighted Target Price (12mth) 523.9 708.2 0.74 100% Source: Company data, Credit Suisse estimates
Key catalysts
■ Signing up pre-sales customers progressively over the next 18 months will see a number of announcements over this period. We note that the US government only purchases capacity on 12- month contracts hence, this will delay many contract discussion into FY15. ■ Regional pricing trends and pre-sales price discounts: Pricing is a material driver of value for NWT. We therefore will be focusing on pricing trends in the region and looking for a slowly increasing pre-sales contract discount. ■ Jabiru-2 payload launch on MEASAT 3b in March-2014. ■ Jabiru 3 and 4 funding and timing plans could be announced in 2014. ■ Jabiru-1 launch expected in French Guinea in mid-2015.
Global Satellite 60 07 February 2014
Figure 70: NWT Income Statement and Jabiru-1 operating assumptions Consolidated P&L (A$mn) FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F Sale of Goods 1.1 2.0 2.2 1.1 1.8 2.5 2.6 2.8 2.9 3.0 3.1 3.2 3.3 3.3 Rendering of services 23.1 26.2 34.9 38.0 36.3 50.2 53.5 57.0 59.8 62.1 64.0 65.5 66.7 67.7 Govt. Grants 0.7 0.5 ------Satellite Development ------99.0 183.6 205.5 224.8 227.9 241.2 281.1 282.4 Revenues from operating activities 25.0 28.7 37.2 39.2 38.1 52.6 155.1 243.4 268.3 290.0 295.0 309.8 351.1 353.4 Other income ------Total revenues 25.0 28.7 37.2 39.2 38.1 52.6 155.1 243.4 268.3 290.0 295.0 309.8 351.1 353.4
COGS -13.2 -15.9 -21.3 -23.2 -24.6 -30.0 -77.0 -81.8 -85.1 -87.9 -90.1 -92.2 -94.7 -96.3 Gross Profit 11.8 12.9 15.8 16.0 13.5 22.7 78.2 161.6 183.2 202.1 204.9 217.6 256.4 257.2 Total operating expenses -10.3 -11.1 -12.0 -12.6 -13.4 -14.8 -17.4 -19.7 -20.7 -21.5 -22.0 -22.7 -23.8 -24.2
EBITDA 1.5 1.8 3.8 3.4 0.0 7.9 60.8 141.9 162.5 180.5 182.9 194.9 232.5 233.0 Depreciation & Amortisation -1.5 -1.5 -1.6 -1.6 -1.2 -1.3 -42.5 -44.0 -45.5 -46.7 -47.6 -48.3 -49.1 -49.8 EBIT -0.1 0.3 2.2 1.8 -1.2 6.6 18.3 97.9 117.0 133.9 135.3 146.7 183.4 183.2 Net interest 0.1 0.1 0.1 0.1 1.0 0.8 -6.3 -11.5 -8.8 -5.8 -2.9 -0.1 1.3 2.4 Profit before tax 0.0 0.3 2.3 1.8 -0.2 7.4 11.9 86.3 108.2 128.1 132.4 146.6 184.7 185.6 Tax - - - - 0.1 -2.2 -3.6 -25.9 -32.5 -38.4 -39.7 -44.0 -55.4 -55.7 OEI ------Normalised NPAT 0.0 0.3 2.3 1.8 -0.2 5.2 8.3 60.4 75.8 89.6 92.7 102.6 129.3 129.9
Key financials FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F EPS - basic (cps) 0.0 0.2 1.1 3.1 0.0 0.9 1.4 9.7 12.0 14.1 14.6 16.1 20.2 20.3 Normalised EPS - diluted (cps) 0.0 0.2 1.0 0.5 0.0 0.7 1.2 8.5 10.7 12.5 12.9 14.3 17.9 18.0 EPS growth -101% 50049% 477% -50% -105% -3184% 60% 623% 25% 17% 3% 10% 26% 0% Diluted average shares 7,734.8 186.3 232.4 379.7 676.3 703.5 705.5 707.5 709.5 714.9 716.9 718.9 720.9 722.9 PER (x) 144283.1x 287.7x 49.9x 100.7x -2029.6x 65.8x 41.0x 5.7x 4.5x 3.9x 3.8x 3.4x 2.7x 2.7x DPS (cps) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.8 6.3 6.5 7.1 9.0 9.0 Payout ratio (%) 0% 0% 0% 0% 0% 0% 0% 0% 26% 50% 50% 50% 50% 50%
Key operational financials FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F EBITDA margin (%) 5.9% 6.1% 10.2% 8.6% 0.1% 14.9% 39.2% 58.3% 60.6% 62.3% 62.0% 62.9% 66.2% 65.9% EBIT margin (%) -0.2% 0.9% 5.9% 4.5% -3.1% 12.5% 11.8% 40.2% 43.6% 46.2% 45.9% 47.3% 52.3% 51.8% NPAT margin (%) 0.1% 1.1% 6.1% 26.7% -0.4% 9.9% 5.4% 24.8% 28.2% 30.9% 31.4% 33.1% 36.8% 36.8% Tax rate (%) 0.0% 0.0% 0.0% 0.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% EBITDA growth (%) -245.1% 18.3% 116.1% -11.1% -98.6% 16444.3% 673.0% 133.5% 14.5% 11.1% 1.3% 6.6% 19.3% 0.2% EBIT growth (%) -97.9% -546.4% 774.0% -19.8% -167.5% -658.2% 176.5% 436.1% 19.6% 14.4% 1.0% 8.4% 25.1% -0.1% NPAT growth (%) -100.9% 1107.7% 619.4% 362.5% -101.5% -3307.5% 60.8% 625.0% 25.4% 18.3% 3.4% 10.7% 26.0% 0.5%
Jabiru -1 Operating Assumptions FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F
Revenue (A$mn) - 99.0 183.6 205.5 224.8 227.9 241.2 281.1 282.4 EBITDA (A$mn) - 52.3 132.9 153.2 171.1 173.4 185.4 223.1 223.6 EBITDA margin (%) 52.8% 72.4% 74.6% 76.1% 76.1% 76.9% 79.4% 79.2%
Revenue per transponder (US$mn/TPE/p.a.) Ka band pre sales - 0.99 0.99 0.99 0.99 0.99 0.99 - - Ka band Spot - 1.31 1.31 1.32 1.33 1.33 1.34 1.35 1.35 Ka band (blended) - US$mn/TPE/p.a. - 0.69 1.02 1.05 1.07 1.08 1.14 1.35 1.35
KU & S band US$m/TPE - 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 Blended ARPTE US$m/TPE/p.a. - 0.66 0.98 1.01 1.03 1.04 1.10 1.28 1.28 Blended ARPTE A$m/TPE/p.a. - 0.77 1.15 1.19 1.21 1.22 1.29 1.50 1.51
Utilisation (%) Ka band pre-sales 0.0% 60.0% 60.0% 60.0% 60.0% 60.0% 0.0% 0.0% 0.0% Ka band post sales 0.0% 1.7% 8.3% 15.0% 20.0% 20.0% 80.0% 80.0% 80.0% Ka band utilisation 0.0% 61.7% 68.3% 75.0% 80.0% 80.0% 80.0% 80.0% 80.0%
Ku and S band 0.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Blended Utilisation (%) 0.0% 64.8% 71.0% 77.1% 81.7% 81.7% 81.7% 81.7% 81.7%
Opex Analysis (A$000/TPE/p.a.) COGS / TPE na 195.3 205.5 210.2 214.8 218.0 222.2 228.8 232.1 Opex / TPE na 8.6 16.0 17.9 19.6 19.9 21.1 24.6 24.7 Total Cost (A$000/TPE/p.a.) na 204.0 221.5 228.1 234.4 237.9 243.3 253.4 256.8 o/w ..Variable na 28.4 42.4 45.5 48.1 47.8 49.4 55.6 55.0 ..Fixed na 175.5 179.1 182.7 186.3 190.1 193.9 197.8 201.8 Source: Company data, Credit Suisse estimates
Global Satellite 61 07 February 2014
Figure 71: Cash flow and balance sheet Cashflows (A$mn) FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F Receipts from customers 24.6 26.7 38.2 41.1 38.1 52.6 155.1 243.4 268.3 290.0 295.0 309.8 351.1 353.4 Payments to suppliers and employees -22.7 -25.9 -33.4 -34.7 -38.1 -44.8 -94.4 -101.5 -105.8 -109.5 -112.1 -114.9 -118.5 -120.4 Interest received 0.1 0.1 0.1 0.1 1.0 0.8 0.6 0.6 0.6 0.7 0.6 0.5 1.3 2.4 Interest paid - -0.0 -0.0 -0.0 - - -7.0 -12.1 -9.3 -6.5 -3.5 -0.6 - - Income tax paid - - - - -0.1 -0.8 5.8 -22.7 -29.2 -35.8 -39.5 -40.0 -51.6 -55.5 Other (working capital and associates) 0.1 - - - -4.6 -1.5 -14.1 -3.3 -3.1 -2.2 0.6 -3.7 -3.8 0.4 Net cashflows from operating activities 2.2 0.9 4.9 6.5 -3.7 6.4 46.1 104.4 121.4 136.7 141.1 151.1 178.4 180.3
Capex -2.8 -9.1 -38.3 -30.2 -221.5 -342.2 -4.7 -7.3 -8.0 -8.7 -8.8 -9.3 -10.5 -10.6 Other investing cashflows - - - 0.0 ------Net cashflows from investing activities -2.8 -9.1 -38.3 -30.2 -221.5 -342.2 -4.7 -7.3 -8.0 -8.7 -8.8 -9.3 -10.5 -10.6
Procees from issues of shares 3.9 6.2 28.8 96.9 6.4 ------Proceeds from borrowings - 3.7 5.8 39.0 177.5 304.0 ------Repayment of borrowings - - - -6.3 - -0.1 -18.9 -43.8 -56.6 -63.4 -63.4 -31.9 - - ECA Cash sweep ------24.7 -62.6 -33.4 -38.0 -40.5 -21.7 - - Payment of dividends ------37.1 -40.9 -41.4 -53.4 -57.5 Other financing cashflows -0.2 -1.1 -3.0 -9.2 ------Net cashflows from financing activities 3.7 8.8 31.6 120.4 183.9 303.9 -43.5 -106.4 -90.0 -138.5 -144.8 -95.0 -53.4 -57.5
Net decrease/increase in cash held 3.0 0.6 -1.8 96.7 -41.2 -31.8 -2.0 -9.4 23.4 -10.5 -12.5 46.8 114.5 112.2 Add opening cash brought forward 1.9 5.0 5.5 3.8 112.8 87.4 59.3 59.2 49.8 73.2 62.7 50.2 97.0 211.5 Net effect of exchange rate changes - - - 12.3 15.8 3.7 2.0 ------Closing cash carried forward 5.0 5.5 3.8 112.8 87.4 59.3 59.2 49.8 73.2 62.7 50.2 97.0 211.5 323.7 ------
Balance Sheet (A$m) FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F Cash 5.0 5.5 3.8 112.8 87.4 59.3 59.2 49.8 73.2 62.7 50.2 97.0 211.5 323.7 Receivables 3.8 5.5 6.3 4.7 6.1 8.4 35.3 39.2 43.1 46.0 46.4 50.7 55.2 55.6 Inventories 0.9 0.5 0.5 0.5 0.6 0.6 1.7 1.8 1.8 1.9 1.9 2.0 2.0 2.1 Other current assets 1.2 2.2 3.9 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 Current assets 10.9 13.7 14.5 124.7 100.7 75.0 102.8 97.5 124.8 117.3 105.2 156.4 275.4 388.0
Plant & equipment 3.8 3.5 3.2 3.2 3.1 3.5 507.7 475.9 443.5 410.6 376.9 342.9 309.3 275.1 Deferred tax assets ------Intangibles 10.3 22.1 65.7 125.9 346.2 686.8 144.7 139.7 134.7 129.7 124.7 119.7 114.7 109.7 Other assets 2.9 2.9 2.9 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 Non-current assets 17.1 28.4 71.9 133.4 353.6 694.5 656.7 619.9 582.5 544.6 505.8 466.8 428.2 389.0 Assets 28.0 42.1 86.3 258.0 454.3 769.6 759.5 717.4 707.3 661.8 611.0 623.2 703.6 777.0 ------Payables 6.2 7.1 7.6 12.3 9.1 10.1 23.8 24.5 25.3 26.2 27.1 27.8 28.5 29.3 Current debt - 0.0 3.5 0.0 0.1 18.4 43.8 56.6 63.4 63.4 31.9 - - - Unearned revenue 2.7 3.9 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Other current liabilities 1.4 1.2 1.7 2.3 2.1 3.6 13.0 16.2 19.5 22.1 22.4 26.3 30.2 30.3 Current Liabiliities 10.3 12.3 18.3 19.6 16.3 37.1 85.6 102.4 113.2 116.7 86.4 59.2 63.7 64.7
Borrowings - 3.7 6.0 31.8 211.2 503.4 446.8 327.5 195.5 94.1 21.7 - - - Other liabilities 0.2 0.2 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Non-current liabilities 0.2 3.9 6.1 32.0 211.4 503.6 447.0 327.7 195.7 94.3 21.9 0.2 0.2 0.2 Liabilities 10.4 16.2 24.4 51.6 227.8 540.7 532.6 430.1 308.9 211.0 108.3 59.4 63.9 64.9 ------Net Assets 17.6 25.9 61.9 206.4 226.5 228.8 226.9 287.3 398.4 450.9 502.7 563.8 639.7 712.1 Net Tangible Assets 7.2 3.9 -3.7 80.6 -119.7 -458.0 82.1 147.6 263.6 321.2 378.0 444.2 525.1 602.5
Contributed equity 125.8 131.4 162.0 265.6 272.0 272.0 272.0 272.0 302.0 302.0 302.0 302.0 302.0 302.0 Retained profits -110.9 -110.6 -108.3 -97.7 -84.0 -81.8 -83.7 -23.3 57.8 110.3 162.1 223.3 299.2 371.6 Reserves 2.6 5.1 8.3 38.6 38.6 38.6 38.6 38.6 38.6 38.6 38.6 38.6 38.6 38.6 Total Equity 17.6 25.9 61.9 206.4 226.5 228.8 226.9 287.3 398.4 450.9 502.7 563.8 639.7 712.1
Gearing FY10 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F Net Debt -5.0 -1.8 5.8 -81.0 123.9 462.6 431.4 334.3 185.6 94.8 3.4 -97.0 -211.5 -323.7 Net Debt / (Equity+Net Debt) (%) -39.4% -7.4% 8.5% -64.5% 35.4% 66.9% 65.5% 53.8% 31.8% 17.4% 0.7% -20.8% -49.4% -83.3% Interest cover (x) (EBIT) 0.7x -3.9x -29.5x -23.1x 1.2x -8.2x 2.9x 8.5x 13.3x 23.0x 47.3x 1564.5x -144.1x -76.2x
Source: Company data, Credit Suisse estimates
Global Satellite 62 07 February 2014 Appendix 1—PEERs maps PEERs is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage.
Figure 72: SES PEERS
Source: Credit Suisse PEERs
Global Satellite 63 07 February 2014
Figure 73: Eutelsat PEERS
Source: Credit Suisse PEERs
Global Satellite 64 07 February 2014
Figure 74: Inmarsat PEERS
Source: Company data, Credit Suisse estimates
Global Satellite 65 07 February 2014 Appendix 2—Credit Suisse HOLT®
Figure 75: Eutelsat HOLT analysis
Source: Company data, Credit Suisse estimates, Credit Suisse HOLT, NOTE: The HOLT valuation based on our 8 years of published financials suggests a HOLT warranted value of Eur 19.9. If the company beats the fade for another two years (expressing a forecast window of 10years) and maintains the returns of the last forecasted year, the HOLT valuation rises to Eur 23.6, in line with our target price.
Global Satellite 66 07 February 2014
Figure 76: SES HOLT analysis
Source: Company data, Credit Suisse estimates, Credit Suisse HOLT. NOTE: The HOLT valuation based on our 3 years of published financials suggests a HOLT warranted value of Eur20.2. If the company beats the fade for another seven years (expressing a forecast window of 10years) and maintains the returns of the last forecasted year, the HOLT valuation rises to Eur 27.00, in line with our target price.
Global Satellite 67 07 February 2014
Figure 77: Inmarsat HOLT analysis
Source: Company data, Credit Suisse estimates, Credit Suisse HOLT. NOTE: The HOLT valuation based on our 8 years of published financials suggests a HOLT warranted value of USD 9.2. If the company beats the fade for another seven years (expressing a forecast window of 15 years) and maintains the returns of the last forecasted year, the HOLT valuation rises to USD 14.0, in line with our target price.
Global Satellite 68 07 February 2014
Figure 78: Newsat HOLT analysis
Source: Company data, Credit Suisse estimates, Credit Suisse HOLT. NOTE: The HOLT valuation based on our 20 years of published financials suggests a HOLT warranted value of AUD 0.85
Global Satellite 69 07 February 2014
Companies Mentioned (Price as of 04-Feb-2014) BT Group (BT.L, 384.6p) British Sky Broadcasting (BSY.L, 877.0p) Eutelsat Communications (ETL.PA, €22.31, NEUTRAL, TP €23.0) Inmarsat PLC (ISA.L, 693.0p, OUTPERFORM, TP 800.0p) Intelsat S.A. (I.N, $19.46, NEUTRAL[V], TP $25.0) NewSat Limited (NWT.AX, A$0.46, OUTPERFORM[V], TP A$0.74) SES (SESFd.PA, €24.1, OUTPERFORM, TP €27.0)
Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Eutelsat Communications (ETL.PA)
ETL.PA Closing Price Target Price Date (€) (€) Rating 06-Jun-11 30.42 33.00 O 04-Jul-11 30.90 33.00 N 14-Sep-11 30.13 33.00 O 12-Jan-12 29.76 R 16-Jan-12 28.58 31.30 O 18-Jan-12 28.79 33.00 19-Apr-13 26.44 30.00 31-Jul-13 21.02 R * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL REST RICT ED
3-Year Price and Rating History for Inmarsat PLC (ISA.L)
ISA.L Closing Price Target Price Date (p) (p) Rating 25-Mar-11 603.50 720.00 O 11-Apr-12 425.20 640.00 14-Sep-12 594.00 700.00 19-Apr-13 689.00 800.00 * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
Global Satellite 70 07 February 2014
3-Year Price and Rating History for Intelsat S.A. (I.N)
I.N Closing Price Target Price Date (US$) (US$) Rating 28-May-13 24.19 25.00 N * 27-Sep-13 24.33 R 31-Oct-13 20.60 24.75 N 01-Nov-13 20.45 25.00 * Asterisk signifies initiation or assumption of coverage.
NEUTRAL REST RICT ED
3-Year Price and Rating History for NewSat Limited (NWT.AX)
NWT.AX Closing Price Target Price Date (A$) (A$) Rating 04-Jul-13 0.40 0.69 O * * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
3-Year Price and Rating History for SES (SESFd.PA)
SESFd.PA Closing Price Target Price Date (€) (€) Rating 18-Jan-12 18.16 20.00 N 14-Sep-12 20.75 24.00 O 19-Apr-13 23.14 27.00 * Asterisk signifies initiation or assumption of coverage.
NEUTRAL OUTPERFORM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive , and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd
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October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
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Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (54% banking clients) Neutral/Hold* 40% (48% banking clients) Underperform/Sell* 14% (43% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Price Target: (12 months) for NewSat Limited (NWT.AX)
Method: Our risk weighted target price of $0.74 for NewSat comprises six valuation scenarios including 1) Base case ($0.87 x 70%) which represents a conservative operating case of the satellite being successfully launched and then filled over a 3 year period with modest price assumptions; 2) Bull case ($1.19 x 5%) with increased spot pricing from US$1.3mn/TPE/p.a. to US$1.4mn/TPE/p.a., opex 10% below base case and a reduced equity beta to 1.20. We still ascribe no value to Jabiru 3 or 4 in this bull case. 3) Bear case 1 ($0.60 x 7.5%) – operate at 80% utilisation with discounted pricing of US$1mn/TPE/p.a. (25% below our base case) for Ka band. 4) Bear case 2 ($0.39 x 7.5%) – We assume that Jabiru 1 sales efforts are not particularly successful and utilisation only reaches 60% with discounted pricing of US$1mn/TPE/p.a. (25% below our base case). We then assume the satellite is not replaced at end of life in 2030. 5) Bear case 3 ($0.27 x 5%) – sell Jabiru 1 in Year 2 of operation or 150% of book value. This scenario assumes that NWT suffers serious problems in selling satellite capacity and M&A appetite for the asset is low. 6) Bear case 4 ($0.01 x 5%) – launch failure with no re-launch. Under this scenario launch insurance would pay out for the cost of the satellite, launch vehicle and capitalised interest of ~US$400mn. This would cover the US$400mn in ECA debt facilities.We have ascribed no value to the orbital slots or additional teleport equipment installed to support Jabiru under this scenario. Re-launching the satellite could require some additional equity under this scenario. So we have not assumed a re-attempt of launch. Risk: The key risks to our $0.74 target price for NewSat are: 1) that NWT suffers launch failure in 2015 (we see this is a very low probability event given the track record of Arianespace; 2) NWT experiences difficulties selling capacity which results in lower than expected pricing, utilisation or both. 3) In-orbit degredation to operating performance. We note that Lockheed Martin's A2100 satellite has not had any in- orbit anomalies since 2004. 4) Funding risks. With the Jabiru-1 project now funded (pending export credit finalisation) we beleive funding risks for Jabiru-1 are low. 5) Management execution risks: NWT has secured a highly experienced senior mangement with a highly
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incentive driven remuneration structure tied to the creation of NWT shareholder value (incentives linked to launch of J-1 and NWT share price).
Price Target: (12 months) for Eutelsat Communications (ETL.PA) Method: Our target price for Eutelsat is based on a DCF valuation with 7.0% WACC and a 2% terminal growth rate. Risk: We see downside risks for our estimates from possible satellite launch delays and from slower than expected take-up of Eutelsat's capacity in Africa, middle east and Latin America.
Price Target: (12 months) for Intelsat S.A. (I.N) Method: Our $25 target price on Intelsat is based on a multi year discounted DCF assuming a 9.1% WACC and 1.2% terminal growth rate. Our 9.1% WACC is based on a 6% cost of debt (excluding tax shield) and a 9.5% Equity Risk Premium. We further apply a 15% minority discount to reflect the lack of control over cash flow as a minority shareholder. Risk: Risks to our $25 target price on Intelsat are on the downside, larger than expected impact to Intelsat's on-network revenues from cuts to the US defense budget as this poses a downside risk to our equity FCF forecasts and reduce our discounted DCF target price. Furthermore we see downside risk to our target price from satellite launch and in-orbit failures as this also would put pressure on our equity FCF forecasts and discounted DCF valuation. Upside risks comes mainly from Intelsat managing to sell more of its existing unused satellite transponder capacity generating more high margin revenues than we currently incorporate in our forecast and would provide upside to our equity FCF and discounted FCF valuation.
Price Target: (12 months) for SES (SESFd.PA) Method: We value SES using a discounted DCF with a 10% discount to address the lack of control of cash flows as a minority shareholder. We further use a WACC of 7.1%. Terminal growth of 2% to address the fact that we see strong demand going forward, from new developing markets and new technologies, with increasing demand for bandwidth such as a more widespread demand for HDTV and in longer-term 3DTV. We use the Western European average ERP of 5.5%.
Risk: Main risks to target price we see as technical issues with existing satellites and failure during launch of new satellites. Eutelsat is launching another 6 satellites in 2011 increasing risk, in our view
Price Target: (12 months) for Inmarsat PLC (ISA.L) Method: We derive our price target of 800p from our 10-year DCF on our published forecasts excluding all payments from Lightsquared. We continue to use a 10 year DCF with a WACC of 9.1% using a perpetuity growth rate of 1.0%. Within this DCF calculation we normalise the CAPEX of Inmarsat given that it tends to be concentrated in 2-3 year periods coinciding with a new satellite constellation upgrade. We use only base case assumptions in our DCF and see substantial upside on the successful launch of new products going forward.
Risk: The main risks to our target price are a major downturn in the maritime industry due to a much worsening economy or a further lengthy delay to the Satphone business launch.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (NWT.AX, ETL.PA, I.N, ISA.L, BSY.L, BT.L) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (NWT.AX, ETL.PA, I.N, BT.L) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (BSY.L, BT.L) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (NWT.AX, I.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (NWT.AX, ETL.PA, I.N, BT.L) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NWT.AX, ETL.PA, I.N, ISA.L, BT.L) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (BSY.L, BT.L) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (I.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (NWT.AX, ETL.PA).
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Credit Suisse has a material conflict of interest with the subject company (ETL.PA) . Credit Suisse is acting as financial advisor to Satelites Mexicanos SA on their announced acquisition by Eutelsat Communications SA. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (NWT.AX, ETL.PA, I.N, SESFd.PA, ISA.L, BSY.L, BT.L) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (ISA.L). The following disclosed European company/ies have estimates that comply with IFRS: (ISA.L, BSY.L, BT.L). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (NWT.AX, ETL.PA, I.N, ISA.L) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. 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