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Morgan Stanley sees risks for Eutelsat

Investment bank Morgan Stanley has cut its rating of satellite operator Eutelsat’s stock back to ‘equal weight’ after it said the company had underestimated the negative impact of weak US demand for military applications and competitive pressure in the data services market.

Morgan Stanley said the outlook for US military demand for the rest of the year was negative, while sharp competition from fibre networks combined with satellite over-capacity in regions including Africa would have a negative impact on Eutelsat’s data services business.

Morgan Stanley said that prospects for the video business, which represents 75% of Eutelsat’s sales, were good, offering a compound annual growth rate of around 7% between now and 2016.

However, it said that most of the new capacity launched by the operator over the last year and half had targeted data services and multi-usage applications. “The next satellite that will bring in meaningful fress new video capacity is [Eutelsat] 3B, which will only be launched in 2Q14,” said the analysts. “Until then, video will remain subdued and will most likely be unable to mitigate the negative impact of the issues…in data services and multi-usage on 2014 financials at least.”

Morgan Stanley also cautioned about uncertainty surrounding Eutelsat’s dispute with SES over its capacity at 28.5° East. “The dispute has been going on for several quarters and [Eutelsat] has never clearly explained whether a potential negative impact was included in old guidance,” it said.

Morgan Stanley said that about €25 million in revenue was at stake, noting that both Eutelsat and SES were confident of a beneficial outcome but that “somebody will have to take the hit”.