New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Sky Network Television / Equity Bottom-Up

<h2>Sky TV<br>1H22 Result—Deep Value, at Inflection?&nbsp;&nbsp;</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Sky TV (SKT) is valued on ~8x our slightly revised 12m forward EPS (5.6x excluding cash), and for the first time in over five years delivered modest revenue growth, both overall and in the all important subscriber revenue line.&nbsp;SKT's&nbsp;return to growth, in combination with stabilising programming costs, gave it the confidence to guide for the resumption of a dividend, which we expect will be NZ15cps in FY22. We see three potential catalysts from here (1)&nbsp;SkyBox&nbsp;subscriber losses moderating from the current run rate of 20k (4%) per&nbsp;annum. We believe the exit of&nbsp;Vodafone&nbsp;TV and the introduction of the new box over the next 12 months will result in modest growth in satellite customers for the first time in nine years in FY23. (2) Setting the initial dividend level sufficiently high, we expect NZ15cps in FY22, increasing to NZ20cps in FY23. (3) Clarity on use of what we estimate to be NZ$140m (~NZ75cps) in cash by the conclusion of FY22. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Relatively minor near-term earnings changes (FY22/FY23/FY24 EBITDA up +3%/+4%/+1%).</li>
<li><strong>Target price</strong>:&nbsp;Increased to NZ$3.10 (from NZ$3) reflecting slightly higher EPS estimates.</li>
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<h3>Growth in subscriber revenues a clear milestone despite continued&nbsp;SkyBox&nbsp;customer decline&nbsp;&nbsp;</h3>
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<p>SKT has lost a third of its high margin, high ARPU, satellite subscribers over the last seven years while at the same time added 25% to programming costs. The combination of these trends has&nbsp;understandably called&nbsp;into question&nbsp;the sustainability of&nbsp;SKT's&nbsp;business model.&nbsp;Satellite customers remain&nbsp;the most important metric when judging SKT&nbsp;but it is no longer the only metric that matters. Streaming&nbsp;now makes up ~15% of subscriber revenues and grew &gt;30%&nbsp;in 1H22, more than offsetting the decline in&nbsp;SkyBox&nbsp;revenue. Looking at sequential trends it is even more encouraging. We estimate that&nbsp;SkyBox&nbsp;revenues declined by ~NZ$1m&nbsp;while streaming revenues increased by NZ$12m.&nbsp;Some of these strong trends are likely to have been boosted by the Olympics, but commentary on the call suggests that the positive trends within streaming are continuing.&nbsp; &nbsp;</p>
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<h3>Cautious approach to cash management understandable but we expect the upper end of payout ratio by FY24&nbsp;</h3>
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<p>The outcome of SKT's flagged capital management review was relatively modest in scope, with no update on targeted leverage ratios, use of cash or actual specific dividend announced. However, SKT announced a dividend payout ratio of 50–80% of free cash flow generation from FY22 onwards. We estimate that SKT will generate ~NZ30cps in free cash flow annually over the coming years. Considering SKT's strong cash position, we see no obvious reasons for why SKT would not grow into the upper end of that range over the next two to three years. We estimate an NZ24cps, fully imputed, dividend by FY24 representing a 13% gross yield. We see potential for additional cash distribution out of SKT's cash balance which we estimate will be ~NZ$140m by the conclusion of FY22. However, we expect SKT to initially prioritise the roll out of its new box and maintain a strong cash position.&nbsp;</p>
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Sky TV 1H22 Result—Deep Value, at Inflection?&nbsp;&nbsp;

OUTPERFORM
Sky TV (SKT) is valued on ~8x our slightly revised 12m forward EPS (5.6x excluding cash), and for the first time in over five years delivered modest revenue growth, both overall and in the all important subscriber revenue line.&nbsp;SKT's&nbsp;return to growth, in combination with stabilising programming costs, gave it the confidence to guide for the resumption of a dividend, which we expect will be NZ15cps in FY22. We see three potential catalysts from here (1)&nbsp;SkyBox&nbsp;subscriber losses moderating from the current run rate of 20k (4%) per&nbsp;annum. We believe the exit of&nbsp;Vodafone&nbsp;TV and the introduction of the new box over the next 12 months will result in modest growth in satellite customers for the first time in nine years in FY23. (2) Setting the initial dividend level sufficiently high, we expect NZ15cps in FY22, increasing to NZ20cps in FY23. (3) Clarity on use of what we estimate to be NZ$140m (~NZ75cps) in cash by the conclusion of FY22. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;Relatively minor near-term earnings changes (FY22/FY23/FY24 EBITDA up +3%/+4%/+1%).
Target price:&nbsp;Increased to NZ$3.10 (from NZ$3) reflecting slightly higher EPS estimates.



Growth in subscriber revenues a clear milestone despite continued&nbsp;SkyBox&nbsp;customer decline&nbsp;&nbsp;


SKT has lost a third of its high margin, high ARPU, satellite subscribers over the last seven years while at the same time added 25% to programming costs. The combination of these trends has&nbsp;understandably called&nbsp;into question&nbsp;the sustainability of&nbsp;SKT's&nbsp;business model.&nbsp;Satellite customers remain&nbsp;the most important metric when judging SKT&nbsp;but it is no longer the only metric that matters. Streaming&nbsp;now makes up ~15% of subscriber revenues and grew &gt;30%&nbsp;in 1H22, more than offsetting the decline in&nbsp;SkyBox&nbsp;revenue. Looking at sequential trends it is even more encouraging. We estimate that&nbsp;SkyBox&nbsp;revenues declined by ~NZ$1m&nbsp;while streaming revenues increased by NZ$12m.&nbsp;Some of these strong trends are likely to have been boosted by the Olympics, but commentary on the call suggests that the positive trends within streaming are continuing.&nbsp; &nbsp;


Cautious approach to cash management understandable but we expect the upper end of payout ratio by FY24&nbsp;


The outcome of SKT's flagged capital management review was relatively modest in scope, with no update on targeted leverage ratios, use of cash or actual specific dividend announced. However, SKT announced a dividend payout ratio of 50–80% of free cash flow generation from FY22 onwards. We estimate that SKT will generate ~NZ30cps in free cash flow annually over the coming years. Considering SKT's strong cash position, we see no obvious reasons for why SKT would not grow into the upper end of that range over the next two to three years. We estimate an NZ24cps, fully imputed, dividend by FY24 representing a 13% gross yield. We see potential for additional cash distribution out of SKT's cash balance which we estimate will be ~NZ$140m by the conclusion of FY22. However, we expect SKT to initially prioritise the roll out of its new box and maintain a strong cash position.&nbsp;


Sky TV: 1H22 Result—Deep Value, at Inflection?