[Via Satellite 10-23-13] After a recent Morgan Stanley report that predicted difficult times ahead for the FSS sector, another European investment firm, Natixis Securities, has released a report giving its thoughts on the stocks it covers: Avanti, Eutelsat, SES and Inmarsat. Eric Beaudet, a satellite equity analyst said in the research note that Natixis “remains cautious about the sector in the run-up to earnings season.”

Interestingly, Avanti remains Natixis’ top pick in the sector since it’s unlikely to be impacted by factors such as sequestration going on in the United States. “It has a 42 million pounds ($67.88 million) backlog for 2013/14 vs. 20 million pounds ($32.32 million) sales generated over 2012/13, so we are confident that the group will be able to continue delivering solid sales growth and also positive FCF for the first time this year, 30 million pounds ($48.49 million) in fixed costs, which should reassure the market that its business model is sustainable,” Beaudet said.

As Avanti is the firm’s top pick, it is Inmarsat where Natixis has cut its estimates most sharply. “The group is the most heavily exposed in the sector to the U.S. government (>15 percent of sales) and, hence, to the budget sequestration, as evidenced by the profit warning it issued back in May,” says Beaudet. “Moreover, the profit warning from Iridium (6 percent sales growth vs. 6/8 percent previously targeted), its closest peer in the MSS segment, once again emphasizes the fact that data communication satellites are being loaded more slowly than initially expected (i.e. disappointing revenues from Eutelsat’s and Avanti’s Ka-band satellites) whereas the video segment is still doing better but the group is not exposed to this segment,” Beaudet said. He added that the group “is the most at risk” out of the stocks it covers and highlights a number of reasons why. “It has ambitious growth targets for 2014/2016 (CAGR of 8/12 percent for its MSS division vs. Natixis 8.2 percent estimate). Secondly, its solid run on the stock market recently has pushed its EV/EBITDA 2013e multiple up to 11.5x, well above its historical average (9.3x over 2006/2012), leaving little room for any disappointments,” he said.

In terms of Eutelsat, Natixis has a “buy” rating on the stock and believes that it will come under little pressure in the short term.

According to Natixis, it is not plain sailing for SES either, with the company having “to face a lot of headwinds” in the third quarter. “It will be affected by the U.S. budget sequestration (13 percent of sales generated with the U.S. government), secondly an unfavorable comparison base (6 million euros exceptional sales in Q2 13 linked to the AMC 9 satellite), [thirdly] the delayed launch of the SES 8 satellite (after a Falcon rocket failed), and [lastly] the recent decline in the dollar vs. the euro (€/$ at 1.325 for 2013 in our model vs. 1.30 previously and 1.32 YTD). These elements should more than offset the additional €20 million euros EBITDA that the group will receive after winning its case against Eutelsat (it will receive only a quarter, i.e. €5 million, in 2013), and they have prompted us to cut our 2013/2015 EPS estimates by an average of -3.7 percent,” Beaudet added.