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).

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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>FY20 — Something for Everyone</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Sky TV's (SKT) FY20 provided something for everyone. For the bulls, SKT delivered strong cost control and impressive free cash flow (FCF) in the 2H, further buttressing the recently recapitalised balance sheet. For the bears, there remains little tangible evidence that SKT can meaningfully offset its sharply declining satellite revenue. Questions remain as to what the economics of SKT's business model looks like in an increasingly streaming world — we doubt many were answered in today's result. Maintain NEUTRAL.</p>
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<h3>A difficult bridge to a streaming world</h3>
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<p>SKT's FY20 was largely in line with expectation and company guidance, but reiterated the transformation challenges the company faces. Unsurprisingly, COVID-19 has had an impact on advertising (compounding a downward trend) and commercial (hospitality, accommodation) revenue. Of more structural significance, high value satellite subscriber revenue continued to fall sharply, down -8% or -NZ$48m. SKT continues to struggle to find a meaningful offset. Streaming revenue did increase by +34%/NZ$15m, however, the bulk came from the acquisitions of RugbyPass and Lightbox — we estimate organic growth over the year was only c.NZ$2-3m. EBITDA (ex. impacts of IFRS 16 accounting changes and one-off costs) declined -NZ$89m or -32%.</p>
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<h3>Impressive free cash flow</h3>
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<p>SKT reacted rapidly to the COVID-19 impacts, cutting opex (incl. 18% of labour) and capex, as well as benefitting from reduced programming (rights and production) costs due to less live sport. The 2H highlight was the strong FCF (albeit helped significantly by working capital timing) taking SKT to a NZ$8m net cash position at year end. We expect FCF to remain healthy near-term.&nbsp;&nbsp;</p>
<p>FY21 guidance was upgraded from that provided at May's equity raise (now revenue&nbsp;-6–12% to NZ$660–700m,&nbsp;​​​​​​​<wbr>underlying&nbsp;EBITDA&nbsp;-27–35% to $125–140m, underlying&nbsp;NPAT&nbsp;-51–63% to NZ$15–20m). We continue&nbsp;to view&nbsp;SKT's&nbsp;guidance as&nbsp;conservative (understandable given the current uncertain backdrop) and our forecasts sit slightly above the top&nbsp;end of the range.&nbsp; &nbsp;</p>
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<h3>Uncertainty ahead, with a broad range of potential outcomes&nbsp;</h3>
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<p>SKT is endeavouring to position itself as NZ’s aggregator of sporting and entertainment content in a streaming world. We believe, that long-term, SKT is positioned to potentially fill that role, however, the economics remain highly uncertain. Uptake of streaming is not yet close to offsetting the decline in satellite. SKT plans to offer broadband from early CY21, however, competition is intense (&gt;80 competitors) and capturing material margin will not be easy. Near-term, SKT's earnings will also be pressured by the lift in SANZAAR/NZ Rugby broadcast rights to c.NZ$110m pa vs. the current c.NZ$60–70m starting in 2021. ​​​​​​​We recognise there is a wide margin of error to any valuation assessment of SKT, but at the current share price we (1) believe investors are effectively paying option value for SKT's potential to formulate a long-term sustainable business model, and (2) view the investment risks as balanced; NEUTRAL.</p>
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<div><strong>Matt Henry CFA</strong></div>
<div><a href="mailto:matthew.henry@forsythbarr.co.nz" target="_blank" rel="noopener">matthew.henry@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0115</div>
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Sky TV FY20 — Something for Everyone

NEUTRAL
Sky TV's (SKT) FY20 provided something for everyone. For the bulls, SKT delivered strong cost control and impressive free cash flow (FCF) in the 2H, further buttressing the recently recapitalised balance sheet. For the bears, there remains little tangible evidence that SKT can meaningfully offset its sharply declining satellite revenue. Questions remain as to what the economics of SKT's business model looks like in an increasingly streaming world — we doubt many were answered in today's result. Maintain NEUTRAL.


A difficult bridge to a streaming world


SKT's FY20 was largely in line with expectation and company guidance, but reiterated the transformation challenges the company faces. Unsurprisingly, COVID-19 has had an impact on advertising (compounding a downward trend) and commercial (hospitality, accommodation) revenue. Of more structural significance, high value satellite subscriber revenue continued to fall sharply, down -8% or -NZ$48m. SKT continues to struggle to find a meaningful offset. Streaming revenue did increase by +34%/NZ$15m, however, the bulk came from the acquisitions of RugbyPass and Lightbox — we estimate organic growth over the year was only c.NZ$2-3m. EBITDA (ex. impacts of IFRS 16 accounting changes and one-off costs) declined -NZ$89m or -32%.


Impressive free cash flow


SKT reacted rapidly to the COVID-19 impacts, cutting opex (incl. 18% of labour) and capex, as well as benefitting from reduced programming (rights and production) costs due to less live sport. The 2H highlight was the strong FCF (albeit helped significantly by working capital timing) taking SKT to a NZ$8m net cash position at year end. We expect FCF to remain healthy near-term.&nbsp;&nbsp;
FY21 guidance was upgraded from that provided at May's equity raise (now revenue&nbsp;-6–12% to NZ$660–700m,&nbsp;​​​​​​​underlying&nbsp;EBITDA&nbsp;-27–35% to $125–140m, underlying&nbsp;NPAT&nbsp;-51–63% to NZ$15–20m). We continue&nbsp;to view&nbsp;SKT's&nbsp;guidance as&nbsp;conservative (understandable given the current uncertain backdrop) and our forecasts sit slightly above the top&nbsp;end of the range.&nbsp; &nbsp;


Uncertainty ahead, with a broad range of potential outcomes&nbsp;


SKT is endeavouring to position itself as NZ’s aggregator of sporting and entertainment content in a streaming world. We believe, that long-term, SKT is positioned to potentially fill that role, however, the economics remain highly uncertain. Uptake of streaming is not yet close to offsetting the decline in satellite. SKT plans to offer broadband from early CY21, however, competition is intense (&gt;80 competitors) and capturing material margin will not be easy. Near-term, SKT's earnings will also be pressured by the lift in SANZAAR/NZ Rugby broadcast rights to c.NZ$110m pa vs. the current c.NZ$60–70m starting in 2021. ​​​​​​​We recognise there is a wide margin of error to any valuation assessment of SKT, but at the current share price we (1) believe investors are effectively paying option value for SKT's potential to formulate a long-term sustainable business model, and (2) view the investment risks as balanced; NEUTRAL.




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




Sky Network Television

Sky TV: FY20 — Something for Everyone