Auckland-based Sky Network Television Limited (SKT), which is listed on both the Australian Securities Exchange (ASX) and the New Zealand Stock Exchange, has been a pretty sound performer for Australian shareholders, having moved from $3.25 five years ago to $5.50, with a record high reached earlier this month, at $5.67. This year the share price has moved from $3.85 to its present heights.
Formed in 2005 through the merger of Sky Network Television Limited and Independent Newspapers Limited (which held 78.4% of Sky), Sky provides multi-channel, pay television and free-to-air television services in New Zealand. It has a near-monopoly in pay TV in New Zealand: about half of all New Zealand households receive Sky.
Sky distributes both local and international program content to its subscriber base through a digital satellite network. The company buys program content from offshore and New Zealand production studios as well as producing much of its own content, such as sports programs: Sky broadcasts a total of 109 channels on its digital satellite platform, including 37 basic channels, six specialist channels, three pay-per-view (PPV) adult channels, 13 free-to-air channels, one PPV event channel, three interactive channels, 11 PPV movie channels, six movie channels, 14 audio music channels, seven sport channels, and eight radio channels.
SKY is also the major shareholder in Fatso, New Zealand’s on line DVD rental service and also publishes two monthly magazines; SKYWATCH, the program guide and SKYSPORT. Igloo, a low-cost Pay TV service with IP connectivity through a set-top box, was launched in December 2012: it is a joint venture (Sky 51%) with the state-owned Television New Zealand. There is also a joint venture with Vodafone in ultra-fast broadband-delivered ‘Vodafone TV,’ and a commercial music business, Sky DMX Music.
In March, News Corporation sold its 43.6% stake in Sky Network Television to a broad range of institutional and retail investors, raising about $700 million. News had been the dominant shareholder in Sky TV since late 1999, when it took control through newspaper company INL. At the time of the sale, Chase Carey, president and chief operating officer of News Corporation, described Sky as a “world class subscription television business,” which had been “an outstanding investment for News Corporation.”
The company reported a very solid performance in FY13. Total revenue increased by 5% to $NZ885 million (A$738 million) as the company added 8,967 subscribers, giving it a record 855,898 subscribers. Average revenue per subscriber per month increased by 5.4% to $NZ75.83 (A$63.19.)
Net profit after tax rose 10.9% to $NZ137.2 million ($A121.3 million), exceeding analysts’ forecasts. Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 5.1% to $NZ353 million (A$294.2 million). Earnings per share (EPS) grew by 11% to 35.26 NZ cents (29.4 Australian cents), and total dividends for the year were 24 NZ cents (20 Australian cents) a share, up 9% from the 22 cents paid in FY12 (excluding a special dividend of 32 cents a share paid in FY12.) The dividend carried a total of 9.33 NZ cents in New Zealand imputation credits.
This year, Sky has told shareholders it expects net profit to rise by as much as 13%, as it scales up its move into mobile and web-based content delivery.
Analysts’ consensus is looking for Sky Network TV to generate NZ$916 million in revenue in FY14, and a net profit of $NZ156 million. Sky’s own forecast ranges are, respectively, NZ$890 million-$900 million, and NZ$145 million-$155 million.
Sky is confident in further growth in the use of its premium product, the MySky HDi decoder, which receives the satellite information, decodes it and sends it to the subscriber’s TV, and offers recording capability. At June 30 2013, Sky says 55.5% of residential subscribers were receiving their pay television services through a MySky decoder, compared to 46.7% a year earlier. The MySky churn rate (the percentage of subscribers who disconnect their service, either voluntarily or because they fail to pay their account) was 11.4%, compared to a 17.9% churn rate on standard digital decoders.
By early next year, Sky expects to upgrade the My Sky decoders further, to work with the broadcaster’s separate iSky download service, which currently works only online. This will be important for increasing average revenue per user, because growth in subscriber numbers may be difficult to extract from here on.
This year, Sky will not benefit (in subscriber number terms) from the major sporting events it had in the previous two years, the Rugby World Cup in FY12 and the London Olympics in FY13. (The Olympics were actually a poor financial result for the broadcaster, because of higher-than-expected production costs and weaker-than-expected advertising revenue) It has also lost the New Zealand rights to the English Premier League football.
On that basis, revenue growth is likely to be modest, but the trade-off should be improved margins from lower program costs and lower depreciation rates. A rising A$ would hurt translated profit, but in terms of the factors it can control, Sky is a well-run company with a hugely profitable business: it runs on margins of 24%, a return on equity of 16% and return capital employed of 45%. However, it looks to have run ahead of fair value: keep Sky Network Television on your watch list, and if it returns to levels around $4.80, Sky will be good buying again.
