Morningstar | Sky Taking Care of Costs Ahead of Stormy Weather
The 3% fall in Sky Network's fiscal 2018 underlying EBITDA to NZD 286 million was commendable, exceeding our forecast of a greater decline by 11%. The beat was mainly driven by lower-than-expected costs, with expense down 7%. Absence of key content costs (summer Olympics, America's Cup) from a year ago helped, as did reduced cost of servicing less subscribers. However, management's operating prowess in managing costs in the face of competitive challenges is evident.While this cost result has led to an average 3% lift to our medium-term EBITDA forecasts, there is no hiding the continuing pressure on subscribers which fell another 7% in fiscal 2018 to 768,000. This is the reason management halved the price and scope of Sky's basic pay TV entry tier in March 2018, in a bid to moderate the pace of pay TV customer declines. It is doing so while investing to ensure the most comprehensive product suite, whether it be via satellite or broadband means.
Early progress on this journey is encouraging, with just 10% of subscribers spinning down to the cheaper tiers so far and reinvesting the savings in new products (SoHo, Sky Movie). This limited the fall in fiscal 2018 blended average revenue per user to 3%, to NZD 76.34 per month. However, this was in line with our expectations and it is still early days in Sky's journey from a linear, set-top-box-based pay TV company to a digital, multi-platform one. As such, our longer-term forecasts are intact, as is our NZD 2.50 (AUD 2.30) fair value estimate per share for no moat-rated Sky.
Shares in the group are trading in line with our intrinsic assessment, having rallied more than 20% since their March 2018-low when Sky announced the pay TV price-cut. The challenge ahead is material, but Sky is financially well-positioned to tackle it, with net debt/EBITDA at 0.8 times and free cash flow still at NZD 150 million-plus levels. A final DPS of NZD 0.075 was declared, fully imputed, bringing the full-year total to NZD 0.15.
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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