A recent Morgan Stanley research report suggest they are cooling on their view of SES, in part, due to the expanded capacity upcoming High Throughput Satellites (HTS) may bring the industry. Each of these satellites has 40x to 100x the capacity of a traditional single-beam satellite. The Morgan Stanley report estimates that industry capacity may increase by 75% by 2016. We suspect the actual capacity increase may much higher by 2017-2018. While this is not surprising, it is surprising that it is taking the investment community so long to realize it. We’ve been discussing this risk for quite some time.
The cynical side of me suggests the large banking fees from debt refinancing and a recent industry IPO may have subconsciously encouraged Wall Street analysts to be a bit less aggressive at evaluating this risk than they might otherwise have been. Now that those deals are largely behind us, it’s safer for them to dig into these uncomfortable issues. To be clear, I am not accusing them of anything inappropriate – but human nature is such that its often hard to criticize the hand that feeds you. However, it’s more troubling to me that the credit rating agencies, the supposedly most independent group of analysts, do not seem to be seriously evaluating this risk.
The irony is that SES is probably one of the least exposes FSS operators to a potential capacity increase due to HTS. Most of SES’s business in Europe and in the US is broadcast traffic where HTS don’t have an advantage. Intelsat is probably one of the more exposed FSS operators to HTS price competition due to its larger amount of point-to-point traffic it carries. And Intelsat is much more heavily levered, thus amplifying any potential impact on the equity. Of course, Intelsat will be launching its own HTS satellites (its Epic system). But the industry capacity increase may create significant downward pressure on point-to-point pricing that it may dwarf any increase in traffic they may see on the Epic satellites.
We don’t pretend to have all of the answers to this issue, but it’s an issue the investment community needs to do a better job of evaluating. And the industry should also do a better job of explaining how it will manage the complex scenario of a massive capacity increase over the next few years.