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</h2>
Play Suspended, Guidance Withdrawn
NEUTRAL
The challenge Sky TV (SKT) faces to transform its businesses has been compounded by COVID-19 and the almost total freeze in global sport. SKT has withdrawn its FY20 revenue and earnings guidance, adding to the company's already considerable medium-term earnings uncertainty. Furthermore, SKT, which has already recognised it requires "a strengthened capital structure" to execute on its transformation strategy, remains likely cum equity raising. All that said, SKT share price has dramatically de-rated. At the current level investors are effectively paying option value for the potential SKT is successful in repositioning itself as NZ's aggregator of sporting content in a streaming world. We believe long-term there is likely a role for a sport content aggregator in NZ, and SKT is positioned to potentially fill that role. We upgrade to NEUTRAL.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></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: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$0.28</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">97.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.3</td>
<td style="text-align: left; width: 43.2pt;">9.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.5&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">1.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">1.9</td>
<td style="text-align: left; width: 48pt;">2.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$0.35</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">24.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.4&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">2.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.0&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">2.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">10.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.0&nbsp;</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: 40.2pt;">-18.5</td>
<td style="text-align: left; width: 42.6pt;">-86.5</td>
<td style="text-align: left; width: 43.2pt;">-37.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">89.9&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">1.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">13.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.0&nbsp;</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: 40.2pt;">7.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">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: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$122m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">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: 42.6pt;">26.8</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">808.3k (NZ$804k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">37.2</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
</tr>
</tbody>
</table>
Suspension of play adds to earnings pressures
SKT has withdrawn its FY20 revenue and EBITDA guidance given COVID-19's disruption of global sport. We understand the majority of the immediate impact has come from declines in advertising and commercial subscription revenue, with a modest number of mass market subscribers cutting sport from their bundles. SKT is able to recover some of the content costs of cancelled events, however (1) many events have only been "postponed" (for now), not cancelled, and (2) the sums able to be recovered sound like they are modest. SKT stated it is "taking decision actions" in response to the revenue hit, cutting opex and deferring "non-essential" capex but these have not been quantified.
The risk for&nbsp;SKT&nbsp;is that some of the revenue impact is not temporary. Customer attrition and bundle trimming trends may be accelerated. Revenue from financially distressed corporate advertisers and commercial subscribers may not bounce back quickly. Given both the structural pressures on&nbsp;SKT's&nbsp;earnings and the substantial uncertainty around the current environment, there is a high margin of error to our&nbsp;SKT&nbsp;forecasts. It is clear, however, that the revenue and earnings direction is down.&nbsp;
Cum&nbsp;equity raising
In its interim report&nbsp;SKT&nbsp;stated directors were "reviewing (SKT's) funding structure ... given the investments required under the transformation programme and maturity of the NZ$100m bond in March 2021". Certainly the current net debt/net debt + market cap of 66% is not sustainable. Some form of equity raising appears highly likely.
Challenges not lost on the share price
The magnitude of the challenges faced by SKT is not lost on the share price, which is down -96% from its peak. We do not profess to have a conviction view on what the long-term future holds for SKT, and we recognise there is a wide margin of error to any valuation assessment. That said, at the current share price (1) investors are effectively only paying option value for the potential SKT's transformation programme is able to deliver a sustainable business long-term, and (2) we view the investment risks as more balanced.
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127

Sky TV
Play Suspended, Guidance Withdrawn
NEUTRAL
The challenge Sky TV (SKT) faces to transform its businesses has been compounded by COVID-19 and the almost total freeze in global sport. SKT has withdrawn its FY20 revenue and earnings guidance, adding to the company's already considerable medium-term earnings uncertainty. Furthermore, SKT, which has already recognised it requires "a strengthened capital structure" to execute on its transformation strategy, remains likely cum equity raising. All that said, SKT share price has dramatically de-rated. At the current level investors are effectively paying option value for the potential SKT is successful in repositioning itself as NZ's aggregator of sporting content in a streaming world. We believe long-term there is likely a role for a sport content aggregator in NZ, and SKT is positioned to potentially fill that role. We upgrade to NEUTRAL.
         


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


Share price
NZ$0.28
NPAT* (NZ$m)
97.0&nbsp;
14.3
9.2&nbsp;
17.5&nbsp;
EV/EBITDA
1.4&nbsp;
1.9
2.1&nbsp;
2.3&nbsp;


Target price
NZ$0.35
EPS* (NZc)
24.9&nbsp;
3.4&nbsp;
2.1&nbsp;
4.0&nbsp;
EV/EBIT
2.2&nbsp;
7.6&nbsp;
10.6&nbsp;
10.0&nbsp;


Risk rating
High
EPS growth* (%)
-18.5
-86.5
-37.0&nbsp;
89.9&nbsp;
PE
1.1&nbsp;
8.3&nbsp;
13.2&nbsp;
7.0&nbsp;


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


Market cap
NZ$122m
Imputation (%)
100
100
100
100
Cash div yld (%)
26.8
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;


Avg daily turnover
808.3k (NZ$804k)
*Based on normalised profits


Gross div yld (%)
37.2
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;



Suspension of play adds to earnings pressures
SKT has withdrawn its FY20 revenue and EBITDA guidance given COVID-19's disruption of global sport. We understand the majority of the immediate impact has come from declines in advertising and commercial subscription revenue, with a modest number of mass market subscribers cutting sport from their bundles. SKT is able to recover some of the content costs of cancelled events, however (1) many events have only been "postponed" (for now), not cancelled, and (2) the sums able to be recovered sound like they are modest. SKT stated it is "taking decision actions" in response to the revenue hit, cutting opex and deferring "non-essential" capex but these have not been quantified.
The risk for&nbsp;SKT&nbsp;is that some of the revenue impact is not temporary. Customer attrition and bundle trimming trends may be accelerated. Revenue from financially distressed corporate advertisers and commercial subscribers may not bounce back quickly. Given both the structural pressures on&nbsp;SKT's&nbsp;earnings and the substantial uncertainty around the current environment, there is a high margin of error to our&nbsp;SKT&nbsp;forecasts. It is clear, however, that the revenue and earnings direction is down.&nbsp;
Cum&nbsp;equity raising
In its interim report&nbsp;SKT&nbsp;stated directors were "reviewing (SKT's) funding structure ... given the investments required under the transformation programme and maturity of the NZ$100m bond in March 2021". Certainly the current net debt/net debt + market cap of 66% is not sustainable. Some form of equity raising appears highly likely.
Challenges not lost on the share price
The magnitude of the challenges faced by SKT is not lost on the share price, which is down -96% from its peak. We do not profess to have a conviction view on what the long-term future holds for SKT, and we recognise there is a wide margin of error to any valuation assessment. That said, at the current share price (1) investors are effectively only paying option value for the potential SKT's transformation programme is able to deliver a sustainable business long-term, and (2) we view the investment risks as more balanced.
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127


Sky TV: Play Suspended, Guidance Withdrawn