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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>FY21 Result&nbsp;— Lives to Fight Another Day</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Sky TV (SKT) reported an FY21 result at the upper end of guidance, but the focus for us was on the operating metrics and forward looking statements. Our overarching impression is that negative trends are improving, but are they improving fast enough?&nbsp;SKT's&nbsp;profits have been squeezed by a large fixed content cost base and falling revenues for five years. In FY22 SKT expects revenues to grow, and we concur. SKT described this as being an inflection point but we believe the jury is still out. Stripping out broadband (which will not contribute meaningfully to absorb fixed costs) and the reversal of COVID-19 related revenue losses from revenue guidance, suggests largely flat revenues versus FY21. Encouraging, yes, but in our view not a catalyst for the stock.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Minor EBITDA changes FY22E/FY23E down -3% and up +2% respectively</li>
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<h3>Content costs are going up and staying up but at least they are unlikely to continue up after FY22&nbsp;&nbsp;</h3>
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<p>SKT gave an admirably clear FY22 content renewal cost guidance (up +NZ$39m) and increased programming costs for Olympics and the Women's Cricket World Cup (up NZ$15m). This equates to ~70% of reported FY21 EBIT and illustrates the operating leverage in the business. SKT described the guided programming costs as "fully loaded" and we would not expect them to grow from FY22. However, neither do we expect them to decline, as the Olympics are being replaced by a step up in NRL content costs and other one off events.&nbsp;&nbsp;</p>
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<h3>Will subscriber revenues actually grow after five years in decline? Yes in absolute terms, potentially on an underlying basis</h3>
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<p>SKT expects subscriber revenues to grow&nbsp;slightly in FY22&nbsp;something we believe to be important. We expect that management will make this its number one priority&nbsp;and that it has enough levers to pull (pricing, advertising and bundling) to achieve it. However, at the end of the day, SKT needs to stop the bleeding&nbsp;of&nbsp; Sky Box&nbsp; subscribers. It lost another 12k (~2%)&nbsp; in 2H21.&nbsp;We expect losses to reduce to ~7k per half in FY22.&nbsp;</p>
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<h3>What do you do with the stock?</h3>
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<p>On our estimates SKT is valued at ~9x our average forward earnings per share over the next 3–4 years and below 2x EV/EBITDA, below historical trading range and peers. Additionally, we believe the risks around SKT's medium term survival has declined over the last year; the bleeding of satellite subscribers has reduced and the customers that do remain are increasingly loyal. Against this weighs the long term prospect of business model obsolescence and the need to re-bid for crucial content rights at regular intervals with uncertain outcomes. We remain NEUTRAL but view the risk reward as incrementally better than in recent times.&nbsp;</p>
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Sky TV FY21 Result&nbsp;— Lives to Fight Another Day

NEUTRAL
Sky TV (SKT) reported an FY21 result at the upper end of guidance, but the focus for us was on the operating metrics and forward looking statements. Our overarching impression is that negative trends are improving, but are they improving fast enough?&nbsp;SKT's&nbsp;profits have been squeezed by a large fixed content cost base and falling revenues for five years. In FY22 SKT expects revenues to grow, and we concur. SKT described this as being an inflection point but we believe the jury is still out. Stripping out broadband (which will not contribute meaningfully to absorb fixed costs) and the reversal of COVID-19 related revenue losses from revenue guidance, suggests largely flat revenues versus FY21. Encouraging, yes, but in our view not a catalyst for the stock.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Minor EBITDA changes FY22E/FY23E down -3% and up +2% respectively



Content costs are going up and staying up but at least they are unlikely to continue up after FY22&nbsp;&nbsp;


SKT gave an admirably clear FY22 content renewal cost guidance (up +NZ$39m) and increased programming costs for Olympics and the Women's Cricket World Cup (up NZ$15m). This equates to ~70% of reported FY21 EBIT and illustrates the operating leverage in the business. SKT described the guided programming costs as "fully loaded" and we would not expect them to grow from FY22. However, neither do we expect them to decline, as the Olympics are being replaced by a step up in NRL content costs and other one off events.&nbsp;&nbsp;


Will subscriber revenues actually grow after five years in decline? Yes in absolute terms, potentially on an underlying basis


SKT expects subscriber revenues to grow&nbsp;slightly in FY22&nbsp;something we believe to be important. We expect that management will make this its number one priority&nbsp;and that it has enough levers to pull (pricing, advertising and bundling) to achieve it. However, at the end of the day, SKT needs to stop the bleeding&nbsp;of&nbsp; Sky Box&nbsp; subscribers. It lost another 12k (~2%)&nbsp; in 2H21.&nbsp;We expect losses to reduce to ~7k per half in FY22.&nbsp;


What do you do with the stock?


On our estimates SKT is valued at ~9x our average forward earnings per share over the next 3–4 years and below 2x EV/EBITDA, below historical trading range and peers. Additionally, we believe the risks around SKT's medium term survival has declined over the last year; the bleeding of satellite subscribers has reduced and the customers that do remain are increasingly loyal. Against this weighs the long term prospect of business model obsolescence and the need to re-bid for crucial content rights at regular intervals with uncertain outcomes. We remain NEUTRAL but view the risk reward as incrementally better than in recent times.&nbsp;


Sky TV: FY21 Result — Lives to Fight Another Day