SES has announced its intention to buy the outstanding 49.5% minority in O3b, the medium earth orbit (MEO) Ka-band high throughput satellite (HTS) constellation. SES is paying $2.6bn in EV (including $1.2bn of 9.5% coupon debt) and is to complete the outstanding $600m capex programme to deploy the fleet. The purchase represents an EV/sales multiple of 26x expected FY16 revenues. The valuation has interesting read across to Avanti as it reflects the value the industry is placing on the newer HTS players. The FY16e Avanti EV/sales multiple is just 6x. Our view remains that as the market recognises the ability of Avanti to execute its plan to reach a highly cash generative phase from mid-2018, this value gap should close. That implies substantial upside for Avanti shares.
The O3b network is a MEO constellation of Ka-band satellites that is being deployed to provide HTS connectivity. SES has announced the deal in the teeth of market concerns over satellite capacity pricing, which we feel relate to the more expensive established Ku-band capacities being disrupted by the new HTS Ka-band entrants such as Avanti Communications Group Plc (LON:AVN). This has led to recent profit warnings and share price weakness for some of the more mature FSS providers. While the ability to more attractively refinance the business is clear, it also suggests SES may regard the timing as a value opportunity following recent sector turbulence and having marginally increased its stake to a majority only in late April. Avanti has established a leading position as the only listed pure Ka-band HTS player with a geostationary earth orbits (GEO) satellite network, with $1.2bn of assets already deployed. A large capacity satellite (HYLAS4) is on track for launch in 2017 completing Avanti’s capex, with the potential to triple revenue and significantly strengthen cash flow.
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