New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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Equity Bottom-Up

Sky Network Television / Equity Bottom-Up

<h2>Sky TV</h2>
1H20&nbsp;— Paddling Upstream
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115
Sky TV's (SKT) 1H20 reinforces the colossal challenge it's facing from declining revenue and escalating costs in an intensely competitive environment for both subscribers and content. Management is operating at an impressive cadence in its endeavour to position SKT to be NZ’s aggregator of sporting and entertainment content in a streaming world. However, there is (unavoidably) a "if you build it, they will come" aspect to SKT's strategy, and the end outcome remains highly uncertain. In the near-term the revenue trend is down, costs are likely to increase (including from the apparent jump in cost of rugby rights to &gt;NZ$100m pa from 2021), and questions around capital structure will be asked ahead of a NZ$200m bond maturity in March 2021. In our view, the risks to earnings and sentiment remain negative. Retain UNDERPERFORM.
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SKT</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$0.60</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">97.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.3</td>
<td style="text-align: left; width: 48pt;">29.1</td>
<td style="text-align: left; width: 48pt;">20.3</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">2.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">2.4</td>
<td style="text-align: left; width: 48pt;">2.6</td>
<td style="text-align: left; width: 48pt;">3.2</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$0.55</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">24.9</td>
<td style="text-align: left; width: 48pt;">7.1</td>
<td style="text-align: left; width: 48pt;">6.7</td>
<td style="text-align: left; width: 48pt;">4.7</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">3.2</td>
<td style="text-align: left; width: 48pt;">6.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.9</td>
<td style="text-align: left; width: 48pt;">12.6</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">-18.5</td>
<td style="text-align: left; width: 48pt;">-71.6</td>
<td style="text-align: left; width: 48pt;">-5.7</td>
<td style="text-align: left; width: 48pt;">-30.1</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">2.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.5</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">12.9</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">436.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">7.5</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$262m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">12.5</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">985.0k (NZ$1,145k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">17.4</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
</tr>
</tbody>
</table>
Result broadly in line; revenue and costs converging
SKT's 1H20 was largely in line with expectation (post November's profit warning), but reinforced the transformation challenges the company faces. Revenue remains under pressure. ​​​​​​​Whilst SKT touted the growth in streaming subs, up +74% (incl. the Rugby Pass acquisition), the +NZ$7m lift in revenue doesn't come close to compensating for the loss of high value satellite subs (revenue down -NZ$23m). ​​​​​​​Costs lifted materially, up +16% or +NZ$41m, with increases from broadcasting rights, production, marketing, the acquisition of Rugby Pass, and NZ$12m of one-offs (incl. restructuring, consultants). ​​​​​​​EBITDA (ex. the impacts of IFRS 16 accounting changes) declined -NZ$60m or -40% (-32% excluding 1H20's one-off costs), while free cash flow (FCF) was minimal, at -NZ$6m or +NZ$9m excluding the Rugby Pass acquisition.
Costs will likely continue to rise&nbsp;— new rugby broadcast rights&nbsp;&gt;NZ$100m pa
SKT has re-contracted the SANZAAR/NZ Rugby broadcast rights for five years starting in 2021. Notes to the accounts suggest the cost will jump to &gt;NZ$100m pa, a substantial lift vs. our c.NZ$65–70m estimate of the current contract. Conversely, the cost of SKT's satellite service looks like it will drop by up to NZ$15m pa (we understand NZ$5–10m pa is likely) also from 2021. &nbsp;&nbsp;
An extreme uncertainty continues to overhang&nbsp;SKT
The uncertainty around SKT's outlook is extreme. Unfortunately, we continue to view near-term risks as negative. Revenue continues to fall. Management wouldn't be drawn on the cost outlook (we understand SKT will provide insight at an upcoming investor day — that would be appreciated), but renewed broadcast rights will be more expensive. SKT's NZ$200m bond matures in March 2021 — declining earnings and limited FCF may give rise to questions around the appropriateness of the current capital structure.&nbsp;

Sky TV
1H20&nbsp;— Paddling Upstream
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115
Sky TV's (SKT) 1H20 reinforces the colossal challenge it's facing from declining revenue and escalating costs in an intensely competitive environment for both subscribers and content. Management is operating at an impressive cadence in its endeavour to position SKT to be NZ’s aggregator of sporting and entertainment content in a streaming world. However, there is (unavoidably) a "if you build it, they will come" aspect to SKT's strategy, and the end outcome remains highly uncertain. In the near-term the revenue trend is down, costs are likely to increase (including from the apparent jump in cost of rugby rights to &gt;NZ$100m pa from 2021), and questions around capital structure will be asked ahead of a NZ$200m bond maturity in March 2021. In our view, the risks to earnings and sentiment remain negative. Retain UNDERPERFORM.



NZX Code
SKT
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$0.60
NPAT* (NZ$m)
97.0&nbsp;
30.3
29.1
20.3
EV/EBITDA
2.0&nbsp;
2.4
2.6
3.2


Target price
NZ$0.55
EPS* (NZc)
24.9
7.1
6.7
4.7
EV/EBIT
3.2
6.5&nbsp;
7.9
12.6


Risk rating
High
EPS growth* (%)
-18.5
-71.6
-5.7
-30.1
PE
2.4&nbsp;
8.5
9.0&nbsp;
12.9


Issued shares
436.0m
DPS (NZc)
7.5
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
Price/NTA
n/a
n/a
n/a
n/a


Market cap
NZ$262m
Imputation (%)
100
100
100
100
Cash div yld (%)
12.5
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;


Avg daily turnover
985.0k (NZ$1,145k)
*Based on normalised profits


Gross div yld (%)
17.4
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;



Result broadly in line; revenue and costs converging
SKT's 1H20 was largely in line with expectation (post November's profit warning), but reinforced the transformation challenges the company faces. Revenue remains under pressure. ​​​​​​​Whilst SKT touted the growth in streaming subs, up +74% (incl. the Rugby Pass acquisition), the +NZ$7m lift in revenue doesn't come close to compensating for the loss of high value satellite subs (revenue down -NZ$23m). ​​​​​​​Costs lifted materially, up +16% or +NZ$41m, with increases from broadcasting rights, production, marketing, the acquisition of Rugby Pass, and NZ$12m of one-offs (incl. restructuring, consultants). ​​​​​​​EBITDA (ex. the impacts of IFRS 16 accounting changes) declined -NZ$60m or -40% (-32% excluding 1H20's one-off costs), while free cash flow (FCF) was minimal, at -NZ$6m or +NZ$9m excluding the Rugby Pass acquisition.
Costs will likely continue to rise&nbsp;— new rugby broadcast rights&nbsp;&gt;NZ$100m pa
SKT has re-contracted the SANZAAR/NZ Rugby broadcast rights for five years starting in 2021. Notes to the accounts suggest the cost will jump to &gt;NZ$100m pa, a substantial lift vs. our c.NZ$65–70m estimate of the current contract. Conversely, the cost of SKT's satellite service looks like it will drop by up to NZ$15m pa (we understand NZ$5–10m pa is likely) also from 2021. &nbsp;&nbsp;
An extreme uncertainty continues to overhang&nbsp;SKT
The uncertainty around SKT's outlook is extreme. Unfortunately, we continue to view near-term risks as negative. Revenue continues to fall. Management wouldn't be drawn on the cost outlook (we understand SKT will provide insight at an upcoming investor day — that would be appreciated), but renewed broadcast rights will be more expensive. SKT's NZ$200m bond matures in March 2021 — declining earnings and limited FCF may give rise to questions around the appropriateness of the current capital structure.&nbsp;

<h2>Sky TV</h2>
1H20 result ­— First Impressions
We haven’t learnt much from 1H20 result.
EBIT was broadly in line with our expectation, with NPAT lower due to higher interest and tax costs. FY guidance is unchanged.
The key challenges facing SKT are reinforced in the result:
<ul>
<li>High value satellite subscribers continue to decline down -6% yoy, which combined with a -NZ$2 decline in satellite ARPU, drove satellite revenue down -7% or –NZ$23m.</li>
<li>Whilst SKT touted the growth in its streaming subs, up +74% (which includes the acquisition of Rugby Pass), the increase in revenue was only +NZ$7m, considerably below that lost from satellite.</li>
<li>Cost lifted materially, up +16% or +NZ$40m (excl. a c.-NZ$20m reduction from the adoption of the IFRS 16 accounting standard), from (1) NZ$12m of non-recurring restructuring and consultancy charges, (2) content and production, including rights from and support for sporting bodies, &amp; (3) the acquisition of Rugby Pass.</li>
<li>EBITDA, excluding the benefit from IFRS 16, declined -NZ$59m or -39%.</li>
<li>Free cash flow is limited, at –NZ$6m or +NZ$9m excluding the acquisition of Rugby Pass.</li>
</ul>
FY20 guidance unchanged
<ul>
<li>Revenue down -3-6% to NZ$750-770m.</li>
<li>EBITDA (like-for-like) down -32-40% to $170-190m. FY19 reported EBITDA was NZ$241m. The adoption of IFRS 16 provides a c.NZ$40m benefit to FY20.</li>
</ul>
Investor briefing
Conference call: 10.00am (NZ time), NZ 0800 423 972, AU 1 800 590 693, Hong Kong 800 961 113, US 800 289 0459. Passcode: 916691.
Webcast:&nbsp;<a href="https://globalmeet.webcasts.com/starthere.jsp?ei=1281175&amp;tp_key=281a768587" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://globalmeet.webcasts.com/starthere.jsp?ei%3D1281175%26tp_key%3D281a768587&amp;source=gmail&amp;ust=1581551607941000&amp;usg=AFQjCNG4eRRtAl4xSNJSXbHJKTdC5G8vTA" rel="noopener">https://globalmeet.webcasts.com/starthere.jsp?ei=1281175&amp;tp_key=281a768587</a>
1H20 result summary
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1658274907472119527&amp;th=1703603e0fd1c6e7&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-7P7nHwoNqkg8HxckBeS1i-b4hvCGh_D_jrFmrh_1iUpMZ1s8EJIe9WaYvtTBsWtd-6f1hOKLTjYHfXlxbbuL2elEAU55FzKGXxn32Akx66EoFRVWq9Grszkg&amp;disp=emb" width="448" height="145" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: Company reports, Forsyth Barr analysis
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
P: +64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland We have moved to: Ground Floor, 48 Empire Street, Cambridge.

Sky TV
1H20 result ­— First Impressions
We haven’t learnt much from 1H20 result.
EBIT was broadly in line with our expectation, with NPAT lower due to higher interest and tax costs. FY guidance is unchanged.
The key challenges facing SKT are reinforced in the result:

High value satellite subscribers continue to decline down -6% yoy, which combined with a -NZ$2 decline in satellite ARPU, drove satellite revenue down -7% or –NZ$23m.
Whilst SKT touted the growth in its streaming subs, up +74% (which includes the acquisition of Rugby Pass), the increase in revenue was only +NZ$7m, considerably below that lost from satellite.
Cost lifted materially, up +16% or +NZ$40m (excl. a c.-NZ$20m reduction from the adoption of the IFRS 16 accounting standard), from (1) NZ$12m of non-recurring restructuring and consultancy charges, (2) content and production, including rights from and support for sporting bodies, &amp; (3) the acquisition of Rugby Pass.
EBITDA, excluding the benefit from IFRS 16, declined -NZ$59m or -39%.
Free cash flow is limited, at –NZ$6m or +NZ$9m excluding the acquisition of Rugby Pass.

FY20 guidance unchanged

Revenue down -3-6% to NZ$750-770m.
EBITDA (like-for-like) down -32-40% to $170-190m. FY19 reported EBITDA was NZ$241m. The adoption of IFRS 16 provides a c.NZ$40m benefit to FY20.

Investor briefing
Conference call: 10.00am (NZ time), NZ 0800 423 972, AU 1 800 590 693, Hong Kong 800 961 113, US 800 289 0459. Passcode: 916691.
Webcast:&nbsp;https://globalmeet.webcasts.com/starthere.jsp?ei=1281175&amp;tp_key=281a768587
1H20 result summary

Source: Company reports, Forsyth Barr analysis
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
P: +64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland We have moved to: Ground Floor, 48 Empire Street, Cambridge.

Sky TV: 1H20 Result ­— First Impressions

<h2>Spark / Sky TV</h2>
Sky to acquire Lightbox — likely positive for Spark, less clear for Sky
Sky TV (SKT) has conditionally agreed to acquire Spark’s (SPK) entertainment streaming service Lightbox, which it plans to merge with its own Neon service.
In our view, the transaction makes strategic sense for both parties, albeit no financial details on the transaction or ongoing commercial relationship have been provided.&nbsp;
Entertainment SVOD (subscriber video on demand) is a highly competitive market, dominated by global scale players. Netflix is already NZ’s largest pay TV provider. Other international players include Disney+, Apple TV (both launched in NZ last month), Amazon Prime and YouTube Premium. At best, there is room for only one domestic SVOD in the country. Lightbox has an established number two position today with c.350k subscribers vs. Neon &lt;100k. Consolidation of Lightbox and Neon should provide benefits though a combined technology platform and a stronger negotiating position with content providers.
Although no financial details have been provided, it is difficult to see that the transaction is not positive for SPK (albeit likely not material). SPK has used Lightbox as a subscriber acquisition/retention tool, we estimate at a cost of c.NZ$15-20m pa. The risk for SPK was that its value as a retention tool diminished as the streaming market became more crowded. We presume, at worst, the transaction will be cost neutral for SPK. Some cost savings are possible. (Dependent on the terms of the ongoing commercial relationship) it may provide SPK with greater flexibility around future bundling options, i.e. (1) Lightbox shifts from fixed cost to variable, which (2) will provide SPK greater flexibility around when and how it bundles Lightbox (SPK already has bundling offers with Netflix and Spotify).&nbsp;
For SKT, we believe combining its Neon service with Lightbox (resulting in increased subscribers and a broader content offering) enhances the likelihood of it establishing a viable entertainment SVOD service long-term. That said, this will still be far from easy in a market dominated by global tech and media giants. The lack of any financial detail – price paid, ongoing commercial arrangement with SPK – means it is not possible to comment on the risk-reward SKT is assuming from the acquisition. It adds to what is already an extreme level of uncertainty around the&nbsp;near and long-term outlook for SKT.&nbsp;
We do not believe you can conclude that the Lightbox agreement means that an amicable arrangement on sports between SPK and SKT is more likely. Entertainment is a global market, sport remains more localised meaning there is less competition and SPK has fewer partnership opportunities. SPK’s recent contract with NZ Cricket extends to 2026 highlighting its long-term focus. We believe there could be competition/regulatory barriers to combining Sky with Spark Sport. &nbsp;
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
P:+64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Spark / Sky TV
Sky to acquire Lightbox — likely positive for Spark, less clear for Sky
Sky TV (SKT) has conditionally agreed to acquire Spark’s (SPK) entertainment streaming service Lightbox, which it plans to merge with its own Neon service.
In our view, the transaction makes strategic sense for both parties, albeit no financial details on the transaction or ongoing commercial relationship have been provided.&nbsp;
Entertainment SVOD (subscriber video on demand) is a highly competitive market, dominated by global scale players. Netflix is already NZ’s largest pay TV provider. Other international players include Disney+, Apple TV (both launched in NZ last month), Amazon Prime and YouTube Premium. At best, there is room for only one domestic SVOD in the country. Lightbox has an established number two position today with c.350k subscribers vs. Neon &lt;100k. Consolidation of Lightbox and Neon should provide benefits though a combined technology platform and a stronger negotiating position with content providers.
Although no financial details have been provided, it is difficult to see that the transaction is not positive for SPK (albeit likely not material). SPK has used Lightbox as a subscriber acquisition/retention tool, we estimate at a cost of c.NZ$15-20m pa. The risk for SPK was that its value as a retention tool diminished as the streaming market became more crowded. We presume, at worst, the transaction will be cost neutral for SPK. Some cost savings are possible. (Dependent on the terms of the ongoing commercial relationship) it may provide SPK with greater flexibility around future bundling options, i.e. (1) Lightbox shifts from fixed cost to variable, which (2) will provide SPK greater flexibility around when and how it bundles Lightbox (SPK already has bundling offers with Netflix and Spotify).&nbsp;
For SKT, we believe combining its Neon service with Lightbox (resulting in increased subscribers and a broader content offering) enhances the likelihood of it establishing a viable entertainment SVOD service long-term. That said, this will still be far from easy in a market dominated by global tech and media giants. The lack of any financial detail – price paid, ongoing commercial arrangement with SPK – means it is not possible to comment on the risk-reward SKT is assuming from the acquisition. It adds to what is already an extreme level of uncertainty around the&nbsp;near and long-term outlook for SKT.&nbsp;
We do not believe you can conclude that the Lightbox agreement means that an amicable arrangement on sports between SPK and SKT is more likely. Entertainment is a global market, sport remains more localised meaning there is less competition and SPK has fewer partnership opportunities. SPK’s recent contract with NZ Cricket extends to 2026 highlighting its long-term focus. We believe there could be competition/regulatory barriers to combining Sky with Spark Sport. &nbsp;
Matt Henry &nbsp;CFA Head of Wealth Management Research Forsyth Barr Limited
P:+64 9 368 0115 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Spark / Sky TV: Sky to Acquire Lightbox — Likely Positive for Spark, Less Clear for Sky

<h2>Sky TV</h2>
Media&nbsp;<a target="_blank"></a>Too Tough for Benefit of the Doubt; Cut to UNDERPERFORM
We doubt Sky TV’s (SKT) FY20 revenue guidance, down -3–6%, would have surprised the market. But we suspect the magnitude of cost escalation, translating into EBITDA (like-for-like) down a substantial -32–40%, will have. We understand what SKT’s new management team is trying to achieve — position the company to be NZ’s aggregator of sporting content in a streaming world. Even if SKT is successful in achieving this goal, the economics of “success” remains highly uncertain. In our view, (1) the market is pricing earnings to stabilise around FY20E levels, which, (2) in an industry being buffeted by disruption and intense competition for subscribers and content, feels optimistic. We downgrade to UNDERPERFORM.
What’s changed?
<ul>
<li>Earnings: Dramatic changes. FY20/21/22E EPS down -61%/-66%/-55%.</li>
<li>Target Price: Cut to NZ80c.</li>
</ul>
Cost in
SKT is a largely fixed cost business, facing declining revenue, and investing to try to stay relevant in a disrupted, and now global, industry. The lift in cost has come from: (1) organisational change including restructuring and rebranding, (2) content and production, including rights from and support for sporting bodies, and (3) the acquisition of Rugby Pass. We understand around one-third of the cost increases are one-off in nature.
Figure 1. FY20 guidance
<table class="table table-striped">
<thead>
<tr>
<td style="width: 35.45pt;">
&nbsp;
</td>
<td style="width: 53.2pt;">
FY19
</td>
<td style="width: 53.25pt;">
IFRS 16
</td>
<td style="width: 53.2pt;">
FY19 adjusted
</td>
<td style="width: 53.25pt;">
FY20 guidance
</td>
<td style="width: 53.25pt;">
yoy % chg
</td>
</tr>
</thead>
<tbody>
<tr>
<td style="width: 35.45pt;">
Revenue
</td>
<td style="width: 53.2pt;">
795
</td>
<td style="width: 53.25pt;"></td>
<td style="width: 53.2pt;">
795
</td>
<td style="width: 53.25pt;">
750–770
</td>
<td style="width: 53.25pt;">
-3–6%
</td>
</tr>
<tr>
<td style="width: 35.45pt;">
Opex
</td>
<td style="width: 53.2pt;">
554
</td>
<td style="width: 53.25pt;"></td>
<td style="width: 53.2pt;">
514
</td>
<td style="width: 53.25pt;">
560–600
</td>
<td style="width: 53.25pt;">
+10–18%
</td>
</tr>
<tr>
<td style="width: 35.45pt;">
EBITDA
</td>
<td style="width: 53.2pt;">
241
</td>
<td style="width: 53.25pt;">
40
</td>
<td style="width: 53.2pt;">
281
</td>
<td style="width: 53.25pt;">
170–190
</td>
<td style="width: 53.25pt;">
-32–40%
</td>
</tr>
</tbody>
</table>
Source: Company reports, Forsyth Barr analysis
Battling disruption and revolution to streaming
The escalation in costs highlights how aggressive SKT is now being in attempting to reposition itself for the modern environment. Whilst this shift is necessary to give SKT a fighting chance at being relevant long-term, the magnitude of the expected EBITDA decline highlights the challenge of streaming economics with its low barriers to entry, and global scale competitors. SKT has lifted its focus on sport, again understandable given sport is more localised than general entertainment. But SKT also faces cost pressure in that category from (1) sporting codes demanding broader and deeper coverage, and (2) competition from Spark Sport, whose recent six-year contract to broadcast NZ Cricket means SKT will, going forward, have to assume bidding for all key content is competitive.&nbsp;
<div class="content-highlight">
Investment View
SKT faces considerable disruptive forces with escalating competition for both audiences and content. We expect continued medium-term earnings pressures from SKT’s customers cutting or trimming bundles, declining advertising revenue, and higher content costs. UNDERPERFORM&nbsp;
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Matt Henry, CFA matt.henry@forsythbarr.co.nz +64 9 368 0115

Sky TV
Media&nbsp;Too Tough for Benefit of the Doubt; Cut to UNDERPERFORM
We doubt Sky TV’s (SKT) FY20 revenue guidance, down -3–6%, would have surprised the market. But we suspect the magnitude of cost escalation, translating into EBITDA (like-for-like) down a substantial -32–40%, will have. We understand what SKT’s new management team is trying to achieve — position the company to be NZ’s aggregator of sporting content in a streaming world. Even if SKT is successful in achieving this goal, the economics of “success” remains highly uncertain. In our view, (1) the market is pricing earnings to stabilise around FY20E levels, which, (2) in an industry being buffeted by disruption and intense competition for subscribers and content, feels optimistic. We downgrade to UNDERPERFORM.
What’s changed?

Earnings: Dramatic changes. FY20/21/22E EPS down -61%/-66%/-55%.
Target Price: Cut to NZ80c.

Cost in
SKT is a largely fixed cost business, facing declining revenue, and investing to try to stay relevant in a disrupted, and now global, industry. The lift in cost has come from: (1) organisational change including restructuring and rebranding, (2) content and production, including rights from and support for sporting bodies, and (3) the acquisition of Rugby Pass. We understand around one-third of the cost increases are one-off in nature.
Figure 1. FY20 guidance




&nbsp;


FY19


IFRS 16


FY19 adjusted


FY20 guidance


yoy % chg






Revenue


795



795


750–770


-3–6%




Opex


554



514


560–600


+10–18%




EBITDA


241


40


281


170–190


-32–40%




Source: Company reports, Forsyth Barr analysis
Battling disruption and revolution to streaming
The escalation in costs highlights how aggressive SKT is now being in attempting to reposition itself for the modern environment. Whilst this shift is necessary to give SKT a fighting chance at being relevant long-term, the magnitude of the expected EBITDA decline highlights the challenge of streaming economics with its low barriers to entry, and global scale competitors. SKT has lifted its focus on sport, again understandable given sport is more localised than general entertainment. But SKT also faces cost pressure in that category from (1) sporting codes demanding broader and deeper coverage, and (2) competition from Spark Sport, whose recent six-year contract to broadcast NZ Cricket means SKT will, going forward, have to assume bidding for all key content is competitive.&nbsp;

Investment View
SKT faces considerable disruptive forces with escalating competition for both audiences and content. We expect continued medium-term earnings pressures from SKT’s customers cutting or trimming bundles, declining advertising revenue, and higher content costs. UNDERPERFORM&nbsp;

Matt Henry, CFA matt.henry@forsythbarr.co.nz +64 9 368 0115

Sky TV: Media Too Tough for Benefit of the Doubt; Cut to UNDERPERFORM

<h2>Sky TV</h2>
FY20 guidance – Not afraid to invest
Sky TV (SKT) has guided to FY20 revenue down -3-6%, and EBITDA (like-for-like) down a substantial -32-40%.
Whilst it was clear SKT’s earnings were going to fall, the extent of cost increases and therefore the magnitude of the EBITDA decline has surprised us. The margin of forecasting error was always very high. SKT is a largely fixed cost business, facing declining revenue, and investing to try to stay relevant in a disrupted, and now global, industry.
The lift in cost has come across: (1) organisational change including restructuring and rebranding, (2) content and production, including rights from and support for sporting bodies, &amp; (3) the acquisition of Rugby Pass. We understand around one-third of the cost increases are one-off in nature. &nbsp;
The market was already well aware of the substantial uncertainty of SKT’s near and long-term earnings given the pressures on both revenue and costs. The guidance highlights how aggressive SKT is now being in its attempt to position itself as NZ’s home of sport in a streaming world. Even if SKT is successful in achieving this outcome, the economics of what “success” looks like remain highly uncertain.
FY20 guidance
<table class="table table-striped"><colgroup><col> <col span="3"> <col> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 90.6pt;"></td>
<td style="text-align: center; width: 48pt;">2019</td>
<td style="text-align: center; width: 48pt;">IFRS 16</td>
<td style="text-align: center; width: 48pt;">2019 adj</td>
<td style="text-align: center; width: 59.4pt;">2020 Forbar (IFRS 16 adj)</td>
<td style="text-align: center; width: 56.4pt;">2020 guidance</td>
<td style="text-align: center; width: 48pt;">yoy % chg</td>
</tr>
<tr>
<td>Revenue</td>
<td style="text-align: center;">795</td>
<td style="text-align: center;"></td>
<td style="text-align: center;">795</td>
<td style="text-align: center;">796</td>
<td style="text-align: center;">750-770</td>
<td style="text-align: center;">-3-6%</td>
</tr>
<tr>
<td>Opex</td>
<td style="text-align: center;">554</td>
<td style="text-align: center;"></td>
<td style="text-align: center;">514</td>
<td style="text-align: center;">509</td>
<td style="text-align: center;">560-600</td>
<td style="text-align: center;">+10-18%</td>
</tr>
<tr>
<td>EBITDA</td>
<td style="text-align: center;">241</td>
<td style="text-align: center;">40</td>
<td style="text-align: center;">281</td>
<td style="text-align: center;">260</td>
<td style="text-align: center;">170-190</td>
<td style="text-align: center;">-32-40%</td>
</tr>
</tbody>
</table>
Source: Company reports, Forsyth Barr analysis
Matt Henry CFA Director / Senior Analyst, Equities Forsyth Barr Limited
T:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 (9) 368 0115 TF:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; 0800 367 227 F:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 (9) 368 0092 P:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; PO Box 97, Auckland 1140 W: &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; <a href="https://foundry.smartkarma.com/www.forsythbarr.co.nz" target="_blank" rel="noopener">www.forsythbarr.co.nz</a> Twitter:&nbsp; @forsythbarr

Sky TV
FY20 guidance – Not afraid to invest
Sky TV (SKT) has guided to FY20 revenue down -3-6%, and EBITDA (like-for-like) down a substantial -32-40%.
Whilst it was clear SKT’s earnings were going to fall, the extent of cost increases and therefore the magnitude of the EBITDA decline has surprised us. The margin of forecasting error was always very high. SKT is a largely fixed cost business, facing declining revenue, and investing to try to stay relevant in a disrupted, and now global, industry.
The lift in cost has come across: (1) organisational change including restructuring and rebranding, (2) content and production, including rights from and support for sporting bodies, &amp; (3) the acquisition of Rugby Pass. We understand around one-third of the cost increases are one-off in nature. &nbsp;
The market was already well aware of the substantial uncertainty of SKT’s near and long-term earnings given the pressures on both revenue and costs. The guidance highlights how aggressive SKT is now being in its attempt to position itself as NZ’s home of sport in a streaming world. Even if SKT is successful in achieving this outcome, the economics of what “success” looks like remain highly uncertain.
FY20 guidance
    



2019
IFRS 16
2019 adj
2020 Forbar (IFRS 16 adj)
2020 guidance
yoy % chg


Revenue
795

795
796
750-770
-3-6%


Opex
554

514
509
560-600
+10-18%


EBITDA
241
40
281
260
170-190
-32-40%



Source: Company reports, Forsyth Barr analysis
Matt Henry CFA Director / Senior Analyst, Equities Forsyth Barr Limited
T:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 (9) 368 0115 TF:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; 0800 367 227 F:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 (9) 368 0092 P:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; PO Box 97, Auckland 1140 W: &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; www.forsythbarr.co.nz Twitter:&nbsp; @forsythbarr

Sky TV: FY20 Guidance – Not Afraid to Invest

New Zealand

SKY Network Television Limited is a pay-television operator in New Zealand.  The Company broadcasts various pay networks via UHF and Digital satellite platforms and offers a variety of programming including news, sports, movies, digital radio and pay-per-view events.

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