New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Sky Network Television / Equity Bottom-Up

<h2>Sky TV<br>1H21 Result&nbsp;— Down but Not Out</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Sky TV's (SKT) 1H21 result had something for everyone. There are clear signs that the erosion of the core satellite subscriber base is slowing&nbsp; in the 11th hour. With a net loss of "only" ~10,000 subscribers in the first half, exclusively attributed to the legacy reseller book, a future with largely stable satellite subscribers is, for the first time since the arrival of Netflix in NZ, imaginable.&nbsp; However, the other side of the equation, ARPU, experienced its most severe decline on record, leaving core satellite revenues down -9% YoY. Another victory like this and the war is lost. SKT gave a comprehensive explanation for the drop in satellite ARPU, attributing the lion's share to one off items. Looking ahead, we believe the pace of decline in satellite revenues will slow and to be almost offset by growth in streaming revenues. With stabilising revenues we expect the focus to shift to costs. With this note we transfer coverage of SKT from Matt Henry to Aaron Ibbotson.</p>
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<h3>What's changed?&nbsp;</h3>
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<ul>
<li><strong>Earnings</strong>:&nbsp;EBITDA +30%/+25%/+25% in FY21/22/23&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Increased to NZ$0.18 (from NZ$0.16)</li>
</ul>
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<h3>Streaming; acquired or not, is becoming an increasingly meaningful&nbsp;part of the puzzle</h3>
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<div id="m_6537669772339260804i6jv3">
<p>Since the acquisition of Lightbox in early 2020 and RugbyPass in 2019, there has been a level of ambiguity with regards to both the number of "true" subscribers and the level of organic growth in streaming.&nbsp;&nbsp;SKT's 1H21 result added some much needed clarity on both. Since the August 2020 update SKT has added ~37,000 (+12%) streaming customers organically and now has ~350,000 paying subscribers providing what we believe will be a relatively stable ARPU of ~NZ$18. One lost satellite customer is worth about 4 new streaming customers. With the combination of Lightbox and Neon, and a relatively competitively priced sports streaming offering, stabilising total subscription revenues are within reach. Our (increased) FY23 subscription revenues are only down -1% vs FY22.&nbsp;</p>
</div>
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<h3>Programming costs; it's not only about sports</h3>
</div>
<div id="m_6537669772339260804i6c1l">
<p>SKT reported an NZ$19m 1H21 reduction in sports rights cost due to COVID-19 related discounts; the key driver for the strong 1H result. Going forward, we expect both a reversal of these temporary savings along with increased rugby programming rights costs following the commencement of the new rugby rights contract (1 January 2021). But it is not only sport rights that are driving programming costs. The landscape for non-sports rights has changed dramatically in a short few years. With the ability to go direct to consumers at minimal costs large content creators such as Disney and Discovery have a different counterfactual today vs just two years ago. SKT has responded to this changed landscape by introducing co-exclusivity, a new concept which we understand involves SKT paying less (than they otherwise would have had to) by giving up the exclusive rights to the content in NZ. We have low visibility on both the cost side of this arrangement as well as the potential cannibalisation of subscribers that this may result in, but with sports rights costs relatively transparent, we believe the focus will increase on other programming costs.&nbsp;</p>
</div>
<div>
<div>
<div><strong>Aaron Ibbotson CFA</strong></div>
<div><a href="mailto:aaron.ibbotson@forsythbarr.co.nz" target="_blank" rel="noopener">aaron.ibbotson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0024</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

Sky TV 1H21 Result&nbsp;— Down but Not Out

NEUTRAL
Sky TV's (SKT) 1H21 result had something for everyone. There are clear signs that the erosion of the core satellite subscriber base is slowing&nbsp; in the 11th hour. With a net loss of "only" ~10,000 subscribers in the first half, exclusively attributed to the legacy reseller book, a future with largely stable satellite subscribers is, for the first time since the arrival of Netflix in NZ, imaginable.&nbsp; However, the other side of the equation, ARPU, experienced its most severe decline on record, leaving core satellite revenues down -9% YoY. Another victory like this and the war is lost. SKT gave a comprehensive explanation for the drop in satellite ARPU, attributing the lion's share to one off items. Looking ahead, we believe the pace of decline in satellite revenues will slow and to be almost offset by growth in streaming revenues. With stabilising revenues we expect the focus to shift to costs. With this note we transfer coverage of SKT from Matt Henry to Aaron Ibbotson.


What's changed?&nbsp;



Earnings:&nbsp;EBITDA +30%/+25%/+25% in FY21/22/23&nbsp;
Target price:&nbsp;Increased to NZ$0.18 (from NZ$0.16)



Streaming; acquired or not, is becoming an increasingly meaningful&nbsp;part of the puzzle


Since the acquisition of Lightbox in early 2020 and RugbyPass in 2019, there has been a level of ambiguity with regards to both the number of "true" subscribers and the level of organic growth in streaming.&nbsp;&nbsp;SKT's 1H21 result added some much needed clarity on both. Since the August 2020 update SKT has added ~37,000 (+12%) streaming customers organically and now has ~350,000 paying subscribers providing what we believe will be a relatively stable ARPU of ~NZ$18. One lost satellite customer is worth about 4 new streaming customers. With the combination of Lightbox and Neon, and a relatively competitively priced sports streaming offering, stabilising total subscription revenues are within reach. Our (increased) FY23 subscription revenues are only down -1% vs FY22.&nbsp;


Programming costs; it's not only about sports


SKT reported an NZ$19m 1H21 reduction in sports rights cost due to COVID-19 related discounts; the key driver for the strong 1H result. Going forward, we expect both a reversal of these temporary savings along with increased rugby programming rights costs following the commencement of the new rugby rights contract (1 January 2021). But it is not only sport rights that are driving programming costs. The landscape for non-sports rights has changed dramatically in a short few years. With the ability to go direct to consumers at minimal costs large content creators such as Disney and Discovery have a different counterfactual today vs just two years ago. SKT has responded to this changed landscape by introducing co-exclusivity, a new concept which we understand involves SKT paying less (than they otherwise would have had to) by giving up the exclusive rights to the content in NZ. We have low visibility on both the cost side of this arrangement as well as the potential cannibalisation of subscribers that this may result in, but with sports rights costs relatively transparent, we believe the focus will increase on other programming costs.&nbsp;



Aaron Ibbotson CFA
aaron.ibbotson@forsythbarr.co.nz
+64 9 368 0024





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Sky Network Television

Sky TV: 1H21 Result — Down but Not Out