Eutelsat - Downhill from here - Model Update
Dear All,
Please find our updated analysis on Eutelsat here.
The deterioration in the GEO business is outweighed by the fresh equity, holding EV practically constant in our calculation. However, as that cash enters Communications S.A., it should pass by the bonds in ESA and directly finance the further roll-out of the LEO constellation. Be that as it may, the ESA bond trajectory will be downhill from here once the company refinances its front-end next year and possibly the expensive ‘29s that become callable in April. So we bide our time until then.
Investment Considerations:
- Having gotten lucky earlier this year, we are watching from the sidelines. We consider this the high point of creditworthiness, anticipating strong cash outflows to create a new cash demand by 2028. So we are going long directionally. From a short perspective, the company is now flush with cash and will refinance its front-end bonds and facilities next year. So the short end should trade like sovereign risk or better.
- We could imagine an arbitrage, owning the 2029s and funding that with a short on the 2028s, since both would likely have to be refinanced at the same time anyway, but the '29s become callable in Apr. '26 and their YTC equals the YTM of the '28s. Otherwise, both would have to be refinanced together at a time when the company probably needs fresh cash again. We only see small upside/downside from other near-term catalysts.
Key Conclusions:
- H2’25 and Q1’26 results were markedly weaker, with management increasingly classifying Video as “legacy” and GEO Mobile Connectivity now clearly past peak. Client demand is shifting to two-way capability, yet uptake in the LEO constellation remains too modest to lead to marked net growth across the company (Current Trading).
- Government revenues matched expectations, but if Ukraine conflict is resolved before Europe finalises a defence strategy, momentum may slow down on competing fiscal demands (Current Trading).
- H2’24 comparatives were flattered by catch-up revenue booking, meaning prior trends overstated stability. We therefore cut GEO forecasts sharply, especially in Mobile Connectivity (c.–20% p.a.), while treating Fixed Connectivity’s steep decline as a one-off distortion rather than structural (RG Model).
- With ~80% of revenue shrinking and three of four segments deteriorating, the GEO business lacks long-term viability. Negative growth on high operating leverage undermines management’s ambition to sustain 60% margins. Meanwhile, cross-subsidies to OneWeb must rise to fund the accelerated CapEx plan there (RG Model).
- Given that H2’24 was artificially inflated and considering the high operating leverage inherent in a GEO constellation, our reduced revenue outlook has reduced the GEO enterprise value by roughly 30%. On this basis, including the sale of the Ground Operations business to EQT and after the required cross-subsidies to OneWeb, equity value would be negative, were it not for the substantial cash raised in H1’26. The lower discount rate—warranted by the improved balance sheet—only compensates for about half of the EV decline (RG Model).
- Communications and OneWeb revenues have exceeded expectations except for ESA re-attributions, which we still struggle to get our heads around. We raise forecasts and lift CapEx to €450m p.a., funded by higher ESA support. EBITDA breakeven may be possible in 2027, but FCF breakeven remains distant due to ongoing investment into the constellation (Communications + OneWeb Model).
- OneWeb revenues are running ahead of plan, supporting positive net cashflow by 2031. CapEx now assumes another 340 satellites, excluding the €2bn IRIS² programme pending detail; this likely requires a fresh funding case. The equity cushion from Dec ’25 allows a materially lower discount rate, nudging shareholder value barely into positive territory (OneWeb DCF).
- The industry has a classic high fixed-cost / low incremental cost, near-monopoly structure. LEO constellations, despite higher up-front cost, outperform and will eventually displace GEOs into a shrinking low-margin niche, struggling to afford maintenance CapEx. OneWeb’s higher altitude compared to Starlink's offers broad coverage at higher latency and lower capacity, yet should still address a viable segment (Industry).
- The €80m EBITDA loss from the Dish disposal will materially impact the remaining, higher-leverage business, even if the sale multiple (7.7× EBITDA–CapEx) is cash-accretive (Dish Sale).
Moving Parts:
- The LEO Government segment should rise. The €1bn French contract should be only the opener, and we expect more military contracts to follow. This could however, take longer if Russia and Ukraine make peace.
- Ground Infrastructure: Eutelsat has closed a deal with EQT Infrastructure VI to sell its passive ground infrastructure for net proceeds of €500m - to settle in H126.
- Video: Half of revenues / the cash cow - continues to fall at 6% p.a. as Starlink offer speed and capacity for VOD. Eutelsat are lowly abandoning the GEO business, looking for cost-efficient maintenance / run-down.
- Together, 80% of the GEO revenue base is shrinking, leaving insufficient margin for even maintenance CapEx. Management guide 60% long-term margins across both businesses, but not on this trajectory.
- Short-term: Eutelsat is losing Russian and US gov. and defence contracts. Cessation in Russia comes in 2026. The US confirm annually in spring and in fall, and may cancel more business. In each case impact unquantified.
Here to discuss this name with you
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk