Did SES prove its Resiliency in Q1 2020?

SES SA reported solid results for Q1 in line with expectations. Video shrinks, networks growth accelerated. Measures to mitigate 2020 headwinds implemented…

Q1 Highlights

press release

We have made a strong start to 2020 with solid first quarter financial results including a step up in underlying revenue growth in SES Networks. Our Networks business now represents more than 40% of our business overall and mobility continues to stand out with 29% growth year-on-year as we have seen the full year contributions of important customer contracts signed during 2019. Strong control over discretionary costs in the quarter contributed to a reduction in recurring operating expenses year-on-year and reflects our ongoing focus on execution.

Steve Collar, CEO

Financial Position

Based on a rather defensive business model, SES’ financial position seems ok, with Cash of 253 m€ as of March 31, adjusted for dividend payment and the undrawn 1.2 bn RCF serving as a comfortable liquidity reserve providing flexibility. According to my latest SES post, next debt repayments are due in March next year (650 m€ @ 4.75%), providing the opportunity to further lower debt costs when refinancing at more attractive rates.

Vulnerable Industries

The three most vulnerable industries (above) could negatively affect revenues, profitability and (most notably?) cashflows

  • Aeronautical and cruise customers drove strong growth in the mobility sub-segment which is part of the network segment
    (structure described here)
    • short term setback regarding growth are to be expected as well as some minor negative cashflow effects
    • longer term the demand for connectivity at sea and in the air should return to its growth trajectory, provided the ‘new normal’ is not too far off
  • A global revival of big events could take some time and reduce the related demand for event driven connectivity which is a very small part of total revenue

Story Intact

My long term investment case still rests on the below assumption. I believe the market (i) discounts the accelerated spectrum relocation payments too much and (ii) underestimates the shif from video to network, since: Currently, the strong growth trajectory of the latter segment is hidden (overshadowed) in the consolidated results based on shrinking video revenues, which should stabilize in a few years

  • Overall growth of 0.8% p.a. until 2025, with
    • Video shrinking, but decelerating (2019-25 CAGR: -3.7%)
    • Network segment driving long-term growth (CAGR 6.5%), driven by strong growth in the mobility subsegment
  • An Ebitda margin 59.4% in 2025, slightly down from 62.6% in 2019, recovering from a modeled 58.8% margin in 2020
    • 59.5% in Q1 in range

Valuation Update

My last valuation from April indicated a fair value per share of € 14.33. Based on the above, I will not update my valuation (no significant changes: lower interest levels, negative short term effects, higher uncertainty regarding aero, cruise, events).

  • Q2 performance will be much more important and potentially much more affected by corona-hit customers

My decision when to execute the purchase of SES shares was bad timing/luck.

Closing Remarks

I hope you enjoyed my post about SES (click here for all company posts).
Do you agree with my main assumptions and opinions?

Best, s4v

Other Companies With Q1 Results

I recently covered two other companies reporting Q1 results, which you might find of interest:

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