EFTA01204332.pdf

1 COMPANY NOTE Target j Estimate Change FM I Telecommunications I Cable & Satellite SES (SESG FP) 5 March 2014 Jefferies BUY 1dO21111 ,--O21V1S11:1 Aunts Price target €27.70 Whither the Cash? (from €28.00) Price €24.84 key Takeaway We remain a buyer of SES on fundamentals alone (just) but its re-rating back to all-time highs begs the question of what drives the upside from here. We look at Financial Summary three potential catalysts, with a focus on uses of its under-geared balance sheet. Net Debt (MM): E3,801.7 We screen the market for potential M&A targets with some clear candidates and a framework for evaluating a deal. A lack of visibility on timing and financial Market Data impact, clearly, limit our ability to pound the table. 52 Week Range: E25.47 - E20.48 Total Entprs. Value (MM): E13,862.4 Still a buyer on fundamentals (just). SES's well-grounded guidance and consensus Market Cap. (MM): E10,060.7 expectations limit scope for upgrades. Our work on expansion capacity continues to give us Shares Out. (MM): 405.1 confidence that the growth guidance is well under-pinned. SES has put concerns on the risk Float (MM): NA from compression on the back foot, with most recent comments providing further comfort on the outlook. The stock has deservedly rallied back to close to all time highs, but now Avg. Daily Vol.: 711,4 21 begs the question, 'what next?". Upside catalysts. We see three obvious upside catalysts, of which two involve leveraging the balance sheet: value accretive M&A; buybacks / special dividends; and / or improving satellite economics. While none of the catalysts comes with particularly high visibility, the latter two are perhaps furthest away from being embedded into expectations. We take the opportunity to recap on the potential impact of SpaceX / electric propulsion on terminal capex assumptions. Preference for M&A. With a long run cash flow yield of -8.5% and a typical satellite IRR of mid-teens, SES is right to signal that M&A has a higher weighting within its options to gear up the balance sheet. Nonetheless, it's worth highlighting that given the dividend coverage, SES's free cash flow yield is a credible proxy for its shareholder return yield meaning, in aggregate out to 2018, it could return 38% of its equity value, should it wish to do so. Whither the cash? We take recent management commentary as a lead and look at the Giles Thorne • Anal yst various M&A options / targets in Asia Pacific. While our work aims to highlight the potential +44 (0)20 7029 8005 targets along with key operational / financial / valuation analysis, we present one clear-cut Jerry Dellis • M&A roadmap: a take-out of the O3b minorities for E860m and an acquisition of Measat 44 (0)20 7029 8517 for E500m. Ulrich Rathe, CFA • Equity Analyst Valuation/Risks 44 (0)20 7029 8286 SES has rallied to 16.3x 2014 PE, against our target rating of 18x. Its discount to Eutelsat (on Nayab Amjad • Equity Analyst 17x 2014 PE), as we had previously argued, has now reduced materially, but is still justified +44 (0)20 7029 8605 given the relative growth outlooks. Principle risk remains oversupply within the industry. • Jefferies International Limited CUR Prey. 2013E hey. 2014E Prey. 2015E Prey. 2016E Price Performance Rev. (MM) 1,855.3 1,862.5 1,990.8 1,980.4 2,083.2 2,064.6 2,146.2 2,119.1 EB1TDR (MM) 1,361.8141,364.7 1,4671 1,451.0 1,535.3 1,512.7 1,581.8 1,552.7 EVJEBITDA Dix 9.6x 9.2x 8.9x EPS LSO 1.40 1.63 1.53 1.78 1.71 1.93 1.84 FY PIE 17.7x 16.2x 14.5x 13.5x Dividend FY Dec — 1.07 — 1.17 1.29 — 1.42 Div. Yield 4.31% 4.71% 5.19% 5.72% 20 MAR-13 .19.-13 NOV-19 MAR-14 Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies 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. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 17 to 22 of this report. EFTA01204332  SESG FP Target I Estimate Change SES 5 March 2014 Buy: €27.7 Price Target Scenarios sasS Target Investment Thesis Upside Scenario Downside Scenario • Continued solid execution, free from • Strong take-up and price inflation for • Major USD depreciation against Euro r•-• negative catalysts (compression, HIS over- capacity, especially in emerging markets • Deep demand deflation from compression &I') supply) • Faster-than-expected redeployment of and HTS over-supply • Relative insulation from short term German transponders • Sequestration headwinds cause n sequestration headwinds • Earlier than expected normalisation of US management to lower FY14 guidance • Revenue growth of 6.3% in 2013, government demand • Oversupply in global satellite capacity T compared to guidance of 6-7% S • Acquisition opportunities from increased industry launches • Margin stability • FY13-16 guidance raised or exceeded • Unable to re-contract Germany • FY14 EPS of €1.53, PE of 18x, price target • FY14 EPS of E1.65, PE of 20x, price target transponders E27.7 E33 • FY14 EPS of E1.4, PE of 16x, price target €22 Long Term Analysis 1 Year Forward P/E Long Term Financial Model Drivers Other Considerations 25. LT Earnings 2013-2016 CAGR 4.4% • SES has a 46.88% stake in a medium earth Organic Revenue Growth 4.4% orbit satellite operator, O3b Acquisition Contribution 0.0% • O3b is yet to launch full global Operating Margin Expansion 0.0% commercial service • O3b equity valuation, as per lox management, of 11.5-3.0bn • 2007 2009 2011 2013 • SES has options to take control and / or lyr PE — Target — — — Upside Downskle 100% ownership of 03b Source: DataStream, jefferies Peer Group 1 Year Forward PE's 2013-15 earnings growth vs. P/E Recommendation / Price Target 20. 19.1x 20% Ticker Rec. PT 11Sa us 10% • SESG W Buy (27.70 16a EEL FP Buy €27.20 0% • ISAT LN Buy 790p 14a .11.0 (10)% AVN Buy 580p 12* (701% see Lit IUt 0. 10x 20x 30x Source: DataStream, jefferies Source: DataStream, jefferies Catalysts Company Description • 1Q14 results on 9 May 2014 SES SA provides satellite-based data transmission and ancillary services. The company operates through Media and Broadcasting services. The Media and Broadcasting segment • 2Q14 results on 25 July 2014 offer space segment services, value added services and customized services. The company • 3Q14 results on 31 October 2014 applications include Digital TV, HDTV, 3D1V and Hybrid 1V. It offers services including • Astra-5B launch on 21 March 2014 direct-to-home broadcasting, feeds for cable and digital terrestrial television networks, • Astra-2G launch in 1Q14 broadband Internet access and mobile backhaul. The company was founded in 1985 and is headquartered in Luxembourg. • SES-9 launch in 2015 • Announcement of incremental growth satellite launches page 2 of 22 Giles Thorne, Equity Analyst, +44 (0)20 7029 8005, Please see important disclosure information on pages 17- 22 of this report. Jefferies EFTA01204333  SESG FP Target I Estimate Change 5 March 2014 Reiterate Buy: whither the cash? We reiterate our Buy rating on SES, albeit with a lower level of conviction given the price action since our last note ("Stop Fretting", 3 December 201 3). There is now only 16.2% 12- month total return on SES, which only just keeps it at a Buy rating under out ratings framework (>15%). We remain a buyer of the name on fundamentals (just) but the well-grounded guidance and consensus expectations limit scope for upgrades. At the same time the recent re-rating raises the question of what could the potential upside catalysts be from here. In response, we see three obvious sources of upside: value accretive M&A; buybacks / special dividends; and / or improving satellite economics. While none of the catalysts comes with particularly high visibility, the latter two are perhaps furthest away from being embedded into expectations (though we take the opportunity to recap on the potential Impact of SpaceX / electric propulsion on terminal capex assumptions). In terms of M&A, we take recent management commentary as a lead and look at the various options that SES now has. We present one potential roadmap: a take-out of the O3b minorities for E860m and an acquisition of Measat for C5OOm. In aggregate this would take SES's leverage up to the 3.3x guidance level. A material deviation above these valuations would be a negative for the equity. Equally, SES may prefer to pursue growth opportunities / markets via strategic partnerships as opposed to outright M&A. Our new target price of E27.7 (from E28) reflects, inter alia, small cuts to our revenue and EBITDA forecasts, a weaker EURUSD assumption and updated capex assumptions (as per most recent management guidance). We perform a DCF-based SoTP valuation for SES (WACC of 7.8% and terminal growth rate of 2%) to derive our estimate of fair value. Table 1: Sum of the parts valuation Weloetloo Methodology 14 (rag F114 1011011 FYI S ISHDA 1g 12014 IV / 2011 stele value to SIS Value Fe etreM Ulna Mina Mon) sham td) Enterprise value DCF (WACC: 7.896; Term gr: 2.0%) 14,140.8 1,451.0 1.512.7 9.7x 9.32 100.0% 14,1408 614.91 93.3% 03b Networks DCF (WACC: 7.896; Term gr. 2.0%) 2,1383 nm nm nm nn 46.9% 1.011.9 4250 6.7% Enterprise value 16,299.3 15,132.7 (37.40 100.0% Len: proportionate net debt (FYI 4 yearend) (3,835.9) Len: minority interests (mokvalue) (80.0) Equity value 11,233.9 Shares in issue (forecast FYI 4 yearend) 405.1 Value per ordinary share (MTh) 427.7 Current Share Price (EUR) (24.9 D.Vidend )idd 4.7% Upside/(downside) to current share price 11.S% Total ?tear faun 14.2% Source: Jefferies We had previously highlighted how SES had compelling appeal against Eutelsat (valuation discount, faster growth, lower leverage, has lower earnings risk). We are therefore not surprised to see SES's discount to Eutelsat now completely reversed (Chart 3) after a difficult 2H13 period when the stock suffered some broker downgrades. With the Satmex acquisition now completed, Eutelsat's growth profile is once again superior to SES's, and on our numbers, Eutelsat justifies its slightly higher multiple (Table 2). Table 2: SES and Eutelsat, key metrics Ilutebst 2013.2016 revenue CACR• 4.4% 6.4% 2014 EBITDA margin 73.1% 76.6% 2014 Leverage (net debt / EIVTDA)" 2.49x 3.30x Ukctive tax rate 12.5% 40.096 2014 PE 16.24 17.0x Source: Company data, lefferies estimates •Cakndarised to a December year end. unadjusted for {X ••Eutelsat leverage xcludes impact of Satmex acquisitka, which is still to get completed page 3 of 22 Giles Thorne, Equity Analyst, +44 (0)20 7029 8005, Please see important disclosure information on pages 17 - 22 of this report Jefferies EFTA01204334  SESG FP Target I Estimate Change 5 March 2014 Chart 1: SES share price, 2-year Chart 2: SES, forward 12-month PE, 2- Chart 3: Forward 12-month PE, performance year performance Eutelsat vs. SES (2u io Is 25 C24 17 20% (22 16 15% (20 15 10% CI 8 14 5% CI6 13 0% CI4 12 (5%) Cl2 11 (10%) CIO 10 (15%) Mar-12 Sep-12 Mar-13 Sep-13 Mar-12 Sep-12 Mar-13 Sep-13 Mar-12 Sep12 Mar-13 Sep-I 3 SESG-FR •. SES - forward PE —PE premium (ETUSES minus I) Source: FactSet Source: FactSet Source: FactSet We see three sources of potential re-rating from here Given SES's re-rating back to close to all-time highs, we begin to question what catalysts could push the equity on from here. Three obvious ones spring to mind: 1. value accretive M&A; 2. buybacks / pedal dividends; and 3. improving satellite economics (here were referring to lower launch costs). We look at the shareholder remuneration and M&A opportunities in the following section. In terms of changing satellite economics, this is a subject we've looked at previously (see the aforementioned "Stop fretting" note). We won't repeat the analysis presented there, but would remind investors of the conclusions: both electric propulsion and the disruptive presence of SpaceX in the market for launch services have potential (indeed, SpaceX is already beginning to crystallise) to bring down medium and long term capex assumptions for satellite replacement, in turn lifting DCF valuations materially. The question of electric propulsion was revisited at the 4Q13 results. In October 2013, SES announced that it was co-investing with the European Space Agency in the Electra development programme. Electra aims at developing an innovative small and medium sized, fully electric platform, manufactured in Europe. SES is the prime contractor to ESA for the first phase of the programme and is working with the German firm, OHB System as a subcontractor for the corresponding manufacturing design of the platform. SES will decide at the end of this development phase whether the Electra platform is commercially viable. In parallel, SES will continue to discuss with all the other satellite manufacturers who are also developing and offering all-electric satellite platforms. This remains a medium term catalyst with limited visibility at the current time, though momentum is going in the right direction. Considering a potential M&A roadmap On a number of occasions now, we have highlighted the attractive cash return potential at SES. Management have been questioned again and again on what they intend to use its increasingly under-levered balance sheet for. It is worth recapping what SES has been saying now for some time on uses of cash, in order of preference: focus on organic growth capex; non-transformational M&A; a growing dividend (note that we already assume annual DPS growth of 10%); and finally special dividends / buybacks. There has been increased speculation on the theme of M&A, something that SES has not gone out of its way to dampen. Speculation has grown from trying to second guess the proceeds, timing and likelihood of a take-out of the O3B minorities to more expansionist M&A. Indeed, on the 4Q13 results call and the subsequent analyst breakfast, SES actually began to be quite explicit on what it's looking for. These developments prompt us to more rigorously look at some of the potential targets. page 4 of 22 Giles Thorne, Equity Analyst, +44 (0)20 7029 8005, Please see important disclosure information on pages 17 - 22 of this report. Jefferies EFTA01204335  SESG FP Target I Estimate Change 5 March 2014 SES will have -(1.2bn of "firepower" by the end of FY14 SES's leverage at the end of 2013 was 2.8x, against a target leverage of 3.3x. By the end of 2014, we estimate leverage of only 2.5x and only 2.2x by the end of 2015. So depending on timing, SES has E1.2-1.6bn of leverage headroom with which it could make acquisitions (Table 3). Table 3: Surplus cash after 00/0 yoy DPS commitment, leverage 2011e 2011e 2016e 2057e 2016e Equity Free cash flow 615.8 68033 735.1 755.7 763.5 Cash dividend (I0% yoy growth) (433.5) (476.11) (524.5) (577.0) (634.7) Surplus cash after dividend 182.3 203.9 210.6 178.7 128.9 layout ratio 77.4% 77.0% 785% 134.0% 91.496 Net debt/ EBITDA 2.494 2.26x 206x 1.91x 1.764 Leverage headroam (3.3x guidance) 0.81x 1.04x 12.44 1.19x 1St Leverage headroom (fm) 1,169.0 1476.6 1918.9 2.197.1 2,466.1 Source: Jefferies estimates A take-out of the O3b pi partners could cost up to 41.1bn Management have been consistently elusive on its potential obligations under the O3b options it holds. The only real steer they've given is that they've previously indicated that O3b has an equity valuation (in their view) of $1.6-3.0bn (€1.i-2.2bn). Speaking at the post 4Q13 results analyst breakfast, management said that they're taking a prudent approach to the decision, waiting to get more visibility on the success of O3b rather than perhaps moving sooner and paying a lower price. They're talking of 2016 for a decision point. We estimate that proceeds to get to a controlling stake of 50.1% (under the right of first refusal option) would be small (only €35-70m), while a complete take out could be significantly larger (€0.58-1.12bn). See Table 4. Table 4: 03b take-out (based on management comments around equity valuation for 03b) Settee or rage 104.64 et range Top strange Equity value (1) 1,500.0 2.250.0 3000.0 Equity value (e) 1,069.0 1,633.6 2,1713.1 Slake purchase to gel to 50.1% 1.2% 1.2% 1.2% Proceeds to get to 50.1% 35.1 52.6 70.1 Star purchasing 499% 49.9% 49.9% Proceeds to then get to 100% 543.4 815.2 1,086.9 Total proceeds 378.5 867.8 1,157.0 Source: Jefferies, company data Screening for potential M&A targets On the 4Q13 results, the CEO confirmed what many would take as a given, that the approach to M&A would be to focus on those regions of the world where SES lacks the "raw materials" for satellite services: namely, orbital slots and / or frequency rights. On this basis, the CEO went on to indicate that Asia Pacific is a region where SES feels under- resourced. Obviously, we must also factor in that SES will only look at "non- transformational" acquisitions. Recent AMA targets discussed in the industry press have been Telesat and Spacecom. While SES would undoubtedly look at these opportunities, we assign a lower likelihood of it ultimately proceeding with an acquisition given that 1) SES has a large operational overlap with Telesat in North America and already has critical mass in those markets; and 2) In the case of Spacecom, while it would certainly be of more interest with its exposure to Asia and Russia via Amos-4 at 65 degrees East, the mainstay of its business is Europe / Middle East / Africa via satellites at 4 degrees west Turning to the seemingly favoured Asia Pacific region, we see four standout credible M&A targets. We screened the universe based on size (SES has been clear it wants more mature businesses with established neighbourhoods) and whether there is a willing seller (which ruled out government-owned businesses). On these two criteria, we would expect the following four operators to be of particular interest to SES: Thaicom, AsiaSat, KoreaSat or page 5 of 22 Giles Thorne, Equity Analyst, +44 (0) 20 7029 8005, Please see important disclosure information on pages 17 - 22 of this report. Jefferies EFTA01204336  SESG FP Target I Estimate Change 5 March 2014 Measat. We have performed some preliminary operational, financial and valuation analysis of the four names: Operational Krsis: we quantify the number of active and planned satellites for each operator and the weighted fleet age (a metric we use in valuation analysis, see below). The details on fleet size, number of transponders, orbital slots and launch dates are given in Table 5 below. In Chart 4, we present a snapshot of existing / planned capacity by orbital slot for each operator. We believe that AsiaSat and Measat, with presence in the India market (a market we look at in some more detail below), would be of particular interest to SES given the scope to consolidate a neighbourhood in a key market (something that SES explicitly said would be of interest during the aforementioned analyst breakfast). Table 5: Fleet details (shaded satellites are yet to be launched) Slog Sate•It* immthed Retires Trasga•Nn weighting Age Cyan) %Warted Age Aa its c Tad Asiakt 106E Assgat 3S 21444.4.99 21-Mar-14 16 28 44 16.4% 15.0 2.4 122E AsiaSat 4 12-Apr-01 12-44, 18 I6 28 44 16.4% 10.9 1.8 101 E Asagat 5 1I4u1.09 314o124 14 26 40 14.9% 4A 0.7 106E Asagat 7 2514ov.11 25-Nov-26 28 45 16.7% 2.1 0.4 120 E AsiaSat 6 (Thaican 7) 30-1un-14 30Jun.29 0 28 za 10.4% .0.3 0.0 106 E A-4gal 8 30-Jun-I4 30-Jun.29 24 0 24 8.9% .0.3 0.0 122E Algat 9 3141ec-Id 31•Dcc31 16 28 44 16A% .2.8 -0.S 269 100.0% 29.2 4.0 Mamas 119E Malcom 4 (baster I) II -Aug-05 1 1-Aug.20 102 0 0 102 56.4% 8.6 48 79 E Malcom 5 (Pqrani 2) 27-May-06 27•May.21 II 0 25 39 21.516 7.8 1.7 79 E Malcom 6 30-Jun-13 304un28 8 0 18 26 14.4% 0.7 0.1 120E Thaicom 7 30.Jun.14 301un.29 0 0 14 14 7.7% .0.3 00 101 100.0% 16.7 6.6 KoreoSol 1 11E Koregat 5 22.Aug-06 22-Aug.21 24 4 0 28 48.3% 7S 3.6 116E Koregat 6 294)ec-10 29•Dec.25 30 0 0 30 51.7% 3-2 1.6 SS 100.0% 10.7 S.9 Measol 148E Meant 2 1444ov-96 14-Nov -I 1 9 6 IS 9.5% 17.3 1.7 119E Meant S 11-Aug-0S 11-Aug-20 7 0 7 4.5% 8.4 0.4 92 E Meant 3 11-Elec-06 11-Dec-21 24 24 48 30.5% 7-2 2.2 92E Meant 3A (Measat IR) 214m.09 21.1un 24 12 12 24 15.1% 4.7 0.7 92E Meant 38 31-Mar-14 1I.Mar•29 48 0 48 30.S% 41.1 00 6E Mensal 24 3141ec•14 31Aec•29 9 6 IS 9.5% -08 -OA 157.1 100.0% 36.9 4.9 Source: Company Data Chart 4: Number of existing / planned orbital slots in Asia* i so 120 100 so 60 40 20 75 80 85 90 95 100 105 110 115 'I I 120 125 110 135 140 145 J 150 •Measat • Thaicom • AsiaSat • KoreaSat • SES m- Source: jefferies, company data Preliminary valuation analysis. Thaicom and AsiaSat are listed so you can take a view on SES's potential outlay from the quoted prices (Table 6). Notwithstanding, for all four names we perform a reverse-engineered valuation based on age-adjusted EV per transponder metrics for recent deals. In an ideal page 6 of 22 Wks Thorne, Equity Analyst, ♦44 (0) 20 7029 8005, Please see important disclosure information on pages 17 - 22 of this report. Jefferies EFTA01204337  SESG FP Target 1 Estimate Change 5 March 2014 world, we'd look at the price / book multiples for recently done deals as it is a measure that looks through the fleet size and age, but we don't have the data to hand. We prefer not to look at plain EV / EBITDA multiples for recent transactions as it's not that meaningful given the various stages of rollout / ramp-up of the targets. In the absence of the data needed for price/book multiples, we came up with the idea of adjusting the EV (in EUR) / Transponder multiple by the weighted age of the fleet as a proxy. The reasoning is that a transponder is a measure of EBITDA potential then it makes sense to look at price paid per transponder rather than EBITDA itself as the company may not yet be generating EBITDA from that transponder — it needs to be adjusted for fleet age, as a buyer would be willing to pay more for a young satellite rather than an old