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Morningstar | Sky Beams Positive Signals

Nothing in Sky Network Television's fiscal 2019 first-half result warrants a change in our NZD 2.50 fair value estimate (AUD 2.40 at current exchange rate). The 16% year-on-year decline in EBITDA to NZD 128 million was in line with our expectations. All the key operating metrics were devoid of surprises, with the 2% fall in subscribers in the half broadly on track relative to our 3% forecast decline for the full year, as was the 3% fall in average revenue per user, or ARPU, versus our 2% forecast decline for the full year. The recent repricing of basic pay-TV product and the concurrent focus on upselling tiers/additional products and streaming services (Neon, Fan Pass) is showing reasonable progress.

As such, the market reaction to the result is puzzling, especially given the already weak stock price leading into the event. This maximum pessimism appears to ignore some positive signals emanating from the no-moat-rated group. First, the unchanged fully-imputed interim dividend of NZD 0.075 was higher than our NZD 0.065 forecast and above consensus of NZD 0.07. Second, management has resumed providing earnings guidance, projecting fiscal 2019 EBITDA of NZD 230 to 235 million versus our largely unchanged estimate of NZD 234 million. This suggests some confidence on the part of management on the near-term trajectory of the business and clearer visibility on the cost side, after the recent extended period of uncertainty and havoc wreaked by streaming competitors.

Granted, these competitive and structural challenges will persist. However, their likely impact is more than reflected in our five-year EBITDA CAGR forecast of minus 7%. Further, at current levels, the stock is trading at fiscal 2019 price/earnings of just 7.3 and enterprise value/EBITDA of merely 3.8. The stock is also yielding 7.7% based on our conservative dividend forecast of NZD 0.13 for the full year, secured by a solid balance sheet with sub-1 net debt/EBITDA forecast for the foreseeable future.

Granted, with the new CEO Martin Stewart due to begin his duties, some changes to strategy and modus operandi are possible. However, it is unlikely he will let up on the current cost-out focus, with operating expenses down 5% in the first half to NZD 322 million. Efforts to increase Sky's presence in the broadband-enabled video-on-demand space are also likely to stay intact, particularly given Stewart's prior experience as CEO of a pay TV operator OSN in the Middle East, introducing cut-price content packages and rebranding "over-the-top," subscription video on demand, or SVOD.

In terms of result details, first-half NPAT dropped 20% year on year to NZD 54 million. Reduction in depreciation (down 8%) and interest expense (down 32%) limited the negative operating leverage from the 16% fall in EBITDA at the bottom line. Revenue fell 8% to NZD 403 million, reflecting the 17,406 fall in subscribers to 750,321 and the 3% decline in ARPU to NZD 75.82.

Management also provided fiscal 2019 full-year NPAT guidance of NZD 85 to 90 million, and we sit at the top of this range with our NZD 90 million estimate. The NZD 70 to 75 million capital expenditure guidance is also in line with our NZD 71 million forecast.

Finally, management was mum on the renewal progress of the all-important rugby rights which expires post-2020. SANZAAR has apparently not yet revealed who are the players interested in bidding against Sky for the rights. However, if the media hysteria from a few months ago is any guide, we would expect a very large, very well-known, online retail juggernaut with a forestry-sounding name to be in the mix. And perhaps Spark Sport, the brain-child of telecom player Spark New Zealand, could be another party with interest.