Updated Forsyth Barr report.
http://s000.tinyupload.com/?file_id=...86998448153842
Maintain NEUTRAL rating
Sky TV's (SKT) FY20 provided something for everyone. For the bulls, SKT delivered strong cost control and impressive freecash flow (FCF) in the 2H, further buttressing the recently recapitalised balance sheet. For the bears, there remains littletangible evidence that SKT can meaningfully offset its sharply declining satellite revenue. Questions remain as to what theeconomics of SKT's business model looks like in an increasingly streaming world — we doubt many were answered in today'sresult. Maintain NEUTRAL.
A difficult bridge to a streaming world
SKT's FY20 was largely in line with expectation and company guidance, but reiterated the transformation challenges thecompany faces. Unsurprisingly, COVID-19 has had an impact on advertising (compounding a downward trend) and commercial(hospitality, accommodation) revenue. Of more structural significance, high value satellite subscriber revenue continued to fallsharply, down -8% or -NZ$48m. SKT continues to struggle to find a meaningful offset. Streaming revenue did increase by +34%/NZ$15m, however, the bulk came from the acquisitions of RugbyPass and Lightbox — we estimate organic growth over the year wasonly c.NZ$2–3m. EBITDA (ex. impacts of IFRS 16 accounting changes and one-off costs) declined -NZ$89m or -32%.
Impressive free cash flow
SKT reacted rapidly to the COVID-19 impacts, cutting opex (incl. 18% of labour) and capex, as well as benefitting from reducedprogramming (rights and production) costs due to less live sport. The 2H highlight was the strong FCF (albeit helped significantly byworking capital timing) taking SKT to a NZ$8m net cash position at year end. We expect FCF to remain healthy near-term.FY21 guidance was upgraded from that provided at May's equity raise (now revenue -6–12% to NZ$660–700m, underlying EBITDA-27–35% to $125–140m, underlying NPAT -51–63% to NZ$15–20m). We continue to view SKT's guidance as conservative(understandable given the current uncertain backdrop) and our forecasts sit slightly above the top end of the range.
Uncertainty ahead, with a broad range of potential outcomes
SKT is endeavouring to position itself as NZ’s aggregator of sporting and entertainment content in a streaming world. We believe, thatlong-term, SKT is positioned to potentially fill that role, however, the economics remain highly uncertain. Uptake of streaming is notyet close to offsetting the decline in satellite. SKT plans to offer broadband from early CY21, however, competition is intense (>80competitors) and capturing material margin will not be easy. Near-term, SKT's earnings will also be pressured by the lift in SANZAAR/NZ Rugby broadcast rights to c.NZ$110m pa vs. the current c.NZ$60–70m starting in 2021. We recognise there is a wide margin oferror to any valuation assessment of SKT, but at the current share price we (1) believe investors are effectively paying option valuefor SKT's potential to formulate a long-term sustainable business model, and (2) view the investment risks as balanced; NEUTRAL.