Morningstar | Risk-Reward Finely Balanced in the Sky
Since hitting a low in mid-March 2018, shares in no-moat Sky Network have rallied more than 20% and are sitting just above our NZD 2.50 (AUD 2.30 at current exchange rate) fair value estimate. This is the first time the stock has overshot our intrinsic assessment since early 2017.Current sentiment may be buoyed by Optus' blundering streaming service in Australia during the recent football World Cup. It was a disaster that may have firmed the odds of Sky in New Zealand retaining the exclusive SANZAAR rugby rights which expire at the end of 2020. Kiwis' prerogative to watch All-Black tests and the Super Rugby competition is such that SANZAAR may recoil at the thought of a telecom or a streaming provider getting the rights and turning the broadcast into an Optus-like buffering fiasco.
Shares in Sky may also be enjoying the halo-effect from the current Fox/Disney and Comcast battle for Sky plc, a U.K-based satellite pay TV player. Granted, Sky plc is narrow-moat-rated, its 23 million-strong subscriber base dwarfs Sky Network's 779,000, and its pan-European market position offers greater growth prospects than New Zealand for Sky Network. Still, investors appear cognisant of the valuation differential between Sky plc (trading at 14 times forward EBITDA, with a forecast five-year EBITDA CAGR of positive 7%) versus Sky Network (at 6 times with a forecast five-year EBITDA CAGR of negative 7%).
It is, however, too early to declare the start of a sustained rerating journey for Sky. The upcoming full-year result may provide a reality check. We forecast fiscal 2018 normalised EBITDA to decline 13% NZD 257 million, 8% below consensus estimate. The recent halving of price and scope of the basic pay TV entry tier may moderate the pace of recent loss in core pay TV subscribers which have slumped 19% over the past 30 months. But the fall in average revenue per user of pay TV will be keenly felt, with our forecast showing a 6% decline in fiscal 2018 to NZD 78.89 per month.
SKY Television and its subsidiaries operate as a provider of multi-channel pay television and free-to air services in New Zealand across a range of platforms and to various devices. Co. and its subsidiaries have a portfolio of content encompassing entertainment, sports, movies, news and others. As of June 30 2015, Co. and its subsidiaries broadcasted a total of 121 channels, which comprised of 46 basic channels, 12 sports channels, five specialist channels, nine movie channels, 12 free-to-air channels, eight radio channels, 14 audio music channels, one pay-per-view (PPV) event channel, 11 PPV movie channels, and three PPV adult channels.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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