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Morningstar | Sky Reported Another Solid Fiscal-Year Result; Awaiting Final Takeover Offer

Sky reported another solid fiscal year-end result with revenue growing 4.5% year over year, similar to our 4.7% projection. Despite this strong revenue growth, we think the shares are trading above the company’s fair value estimate as a stand-alone company. Thus our fair value estimate is based on the latest takeover offer. Our fair value estimate deducted the GBX 22 per share final dividend that had been scheduled. However, management announced it would not pay the final dividend, so we expect to increase our fair value estimate by GBX 22 per share to 1,475 from 1,453. Our narrow moat rating remains intact. We were particularly impressed to see the Italian operation grow its revenue 6%, which slightly surpassed the German operations 5.6% increase. The largest business, which is the United Kingdom, generated a still solid 3.8% increase.

The firm’s revenue growth is primarily being driven by selling additional services. In the fourth quarter customer growth improved 39% to 23 million European households, and products sold jumped 81% to 63 million in the quarter. We continue to expect the firm to widen its subscriber base and the number of services sold per customer. These gains along with selective price increases should enable revenue growth to continue in the mid-4% range.

Sky’s ad business is also doing well and outperformed the ad market in each of its three geographies. In total it grew 10% to GBP 917 million. It is now a large enough business to have a meaningful impact on the full firm. We think it can continue to outperform the ad market.

The firm continues to control costs. Despite a GBP 153 million increase in Bundesliga costs, EBITDA in Germany declined only GBP 28 million, as costs were reduced elsewhere. Overall, the firm generated an adjusted EBITDA margin of 17.3%, spot-on with our projection. We anticipate that Sky can continue to increase revenue at a faster rate than costs, allowing further margin expansion.