Thoughts on SES going down (SESG LX)

Another stock that is surprisingly performing in lockstep with the market (that means deeply red). How come …

This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time. I might transact in any securities at any time.

SES is a turnaround case. Not of high quality, and in addition facing some disruption risk (unfortunately from Elon with deep pockets who also has to uphold his public image, i guess). SES also carries a good pile of debt (most trading well below face value due to todays higher interest levels). With todays hindsight, it is even more clear that reducing low-quality investments at higher prices would have been a good idea, or trade. But, when the price rose so did my believe in my thesis, and the hope for even higher prices. Also, the sizing of the position appears too big now, since I still like the thesis and idea, but if I am willing to add to my position here is less clear to me.

Surprised about the bad performance

I rather thought of SES as a defensive business with regard of the economic cycle. Sure, they have a high debt load and are a turnaround. Further, the growth segment partially depends on higher spending levels from consumers and businesses for cruises and flights, but customer contracts are naturally of long duration and do not get cancelled during a downturn. What might explain the strong sell-off:

Higher interest rate levels, plus higher credit spreads – but most debt is fixed rate and FCC payment should enable strong deleverage. Though, SES’ debt maturities are not that far into the future, and thus will likely be refinancced at much higher rates.

Higher disruption risk from Starlink, Kuiper – most new satellite constellation fail, but with (smart) billionaires being involved the funding might not have to dry up and might not even dry up for a long time in the (probabale?) case that they realize it is not a sound investment case, simply to uphold a public image (which could well be NPV-positive for the smart billionaire). There are several indications that disruption became more likely, I believe.

Another turnaround that doesn’t turn? In an economic downturn the shrinking video segment might struggle further if broadcasters make less money from advertisers and try to reign in costs. The networks segment should see a rebound from cruises and in-flight connectivity since so many consumers have a need for holidays after covid lockdowns but how long until the sectors goes down again?

Risk of bad capital allocation/value destruction seems to be real, as the recent rumoers over Intelsat merger talks illustrate. The problem is acute due to not exactly great management, in my opinion (low equity ownership, state involvement).

What assures me

… or what might create a false sense of safety …

  • Big FCC payment coming in 2023/24 (if execution goes well) driving deleveraging or capital returns
  • Increased dividend to € .50 back from .40, and if! that divi is not cut again makes for a 9% yield.

FCC payment: Depending on the EUR/USD exchange rate to be realized SES should profit from a stronger USD in EUR terms. The cleared milestones ahead of schedule for the first tranche of payments and seem to be well on track for the second. Thus, I believe the chance for timely payment receiving is high. Is it possible that investors/analysts do not fully recognice the FCC payment, nor the Verizon payment? Pricing metrics do not show these one-offs yet and thus the stock might be sold off with other interest rate sensitive stocks?

The dividend was raised and it appears not that likely that management did raise it without being rather sure to at least keep it. A high dividend yield alone is not an indicator of strong value, Eutelsat yields 10%, though SES should earn its EV in FCF faster than Eutelsat.

Disruption risk is overestimated I guess but who knows? Certainly not me, I would not even state to have a good understanding of the industry.

I conclude that I sized this position too large for a low quality turnaround case. This alone should prevent me from increasing the position now.


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