SES/Intelsat - The Margin - Model Update
All,
Please find our updated note on SES here.
This name is now more about spread risk than default, but between its confidence fuelled SPACE refinancing last month and its Q126 results next month, we think this is still a name worth watching. The refinancing dropped book leverage by half a turn and freed up €30m of cash interest burden p.a. But having done the math on H225, we remain alarmed at the pace of margin deterioration. Surely this is a strategic asset in Europe now, but that doesn’t mean its Perps should always trade inside 3%.
Investment Considerations:
- We are not taking a position in either direction at present. Incremental Government and Aviation revenue should about offset the loss in Video this year, but we fear for margins. With the SPACE financing only just completed, we are, if anything, minded to take a short position in the 2.875% perps on the premise that the new business carries lower margins that the traditional broadcast business SES is losing. We could see 5 points of downside if the SPACE transaction, pushed for by Moody's was really necessary to avoid a sub 1.5x cash flow cover (on this operating leverage the cover can move quickly). Technically we can therefore also see 5 points of upside, but we can't make out a catalyst for that.
Key Conclusions:
- LFL EBITDA declined 12% despite headline delivery in line with forecasts, driven by aviation mix dilution, IS-33e capacity costs and accelerating Media erosion. H2 margins fell to ~40% (vs ~43% in H1); if structural, FCF/interest cover compresses to just over ~1.5x (ex-hybrids/perps), leaving low headroom and explaining the need for the SPACE transaction (Current Trading).
- Growth is currently government-led (+47%), with programmes such as PTS-G, GovSat-2, IRIS², SIMON and mPOWER. The constraint is procurement timing rather than demand visibility (Current Trading).
- Media decline has accelerated (-12.6% LFL; Oi, SD switch-offs). The €3bn backlog offers only temporary reprieve. Shrinkage should resume mid single digits (Current Trading).
- C-Band Auction Phase II (deadline July 2027) is a credible deleveraging lever. However, continued €0.50 DPS and €150m buyback documents limited credit discipline (Current Trading).
- In our base case, deleveraging to ~2.5x is largely mechanical (incl. €650m sub-perp replacing 2026 SUNs), with organic deleveraging negligible (~0.04x p.a.). The thesis hinges on the non-recurring nature of the Oi impact; if overstated, debt service capacity weakens materially. Margins are expected to compress further as high-margin GEO broadcast is replaced by more competitive contracts (Model).
- Valuation is highly sensitive to segment mix and relative margins: legacy GEO (Media/Networks) is structurally declining under LEO pressure (e.g. Starlink, Project Kuiper), while aviation is competitive (likely low-margin) and government more resilient. Current EV and leverage appear fair on management assumptions, but as with any asset based business, margin trajectory is the key risk (DCF).
- Strategically, the merged entity’s differentiation rests on MEO (O3b mPOWER) as a bridge between GEO and LEO economics. This requires sustained capex into a declining cash flow base, while reliance on wholesale LEO capacity from Eutelsat (OneWeb) introduces structural dependency. Luxembourg state ownership (33% + golden share) constrains any future restructuring upside (Industry; Company).
Key Conclusions:
- LFL EBITDA down 12% despite reported figures landing on our forecast. Equipment dilution in Aviation, IS-33e capacity costs, and accelerating Media decline drove the shortfall. H2 combined margins dropped to around 40% (from ~43% in H1) — if structural rather than transitional, FCF / Interest coverage will sit at exactly 1.5x without counting the hybrids or perps.
- Reported leverage of 3.9x overstates the picture: Intelsat is only consolidated from July. Annualised, our model puts combined year-end leverage at 3.1-3.2x, now at 2.5x since the SPACE transaction. The deleveraging will, however, come only from mechanical annualisation of the merger, not from organic cash flow. If EBITDA margins drop any further, the deleveraging from FCF will become hard.
- Government demand carries the company (+47% reported). PTS-G, GovSat-2, IRIS-2, SIMON, and the meoSphere pathfinder all confirm positioning. Risk is procurement timelines, not demand.
- Media decline accelerated to -12.6% LFL (Oi bankruptcy, SD switch-offs). The EUR3bn backlog cushion is diminishing and we do not expect stabilisation.
- C-Band Auction II (mandated by July 2027) is a genuine deleveraging catalyst. But maintaining the €0.50/share dividend and a €150m buyback at current leverage signals shareholder pressure over credit discipline.
- We are not modelling further material insurance receipts from the Boeing dispute, but acknowledge a potential future upside.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk