SKT Sky Network Television Limited.

[mistaTea]

I'm grappling with this share and I too can't can't see the metric by which it is under-valued. I WANT to get into it but in following everyone's instruction (to DYOR) I'm struggling to see the value.

I'm projecting (i.e. guessing) NTA of around 7c per share so there is no easy win on that basis. I'm forecasting (i.e wild guessing) NPAT and FCF of around 2c-3c per share for FY20 and FY21. Assuming dividends resume at 1c per share ($18m cash cost to SKT) then a value of 25c implies a no growth discount rate of 4% which feels low for the risk inherent in this share. Even if SKT managed a dividend of 2c in FY22 then a share price of 30c implies a no growth discount rate of around 7% - again this feels low plus investors have to wait 2 years. EPS of 3c with a PE of 8-10 implies a share price of 24-30c - so it could be undervalued on that basis but I still can't see where the growth is coming from.

Why am I assessing this as risky which deserves a high discount rate and no growth for dividend valuation purposes?

• Satellite revenues are falling and being replaced at the rate of 20-25c per $1 lost which is resulting in a falling top line (I know I'm stating the obvious).
• I believe certain costs like transmission will be relatively fixed with annual CPI ratchets so they will be hard to reduce in line with the fall in revenues, unless the new CEO has been busy in this area already.
• Overseas programme commitments involve deep pockets and big balls - SKT has a wall of content coming at them (e.g. the last IR had content purchases of $161 but only $138m was amortised). Trying to turn around the cost of fixed content contracts is like trying to turn the QE2. It will be hard to reduce the content costs without having them languish on the Balance Sheet resulting in future impairments.
• Lastly, the fixed assets are heavily aged - the last AR had historical cost of $930m, a book value of $163 and annual depreciation of $71m - I reckon future investment will likely be needed unless SKT can release cash from their Mt Wellington site (I assume they still own this?)
• In conclusion, historical EBITDA and NPAT are long gone not to be seen again. Hence the share price reset.

As I said, I would like to get into this but it feels like a gamble rather than a risk-free investment with little to no prospects for organic growth.

Disclosure: interested observer and wannabe SKT investor but not currently a holder. Financial experience with a broadcaster.

I stopped reading about half way through the second paragraph. You don’t understand the business so you should absolutely not invest in it.

I’m not being mean here either - just honest. GAAP earnings bear very little relation to owner earnings for a business like sky. You are probably better off looking at other companies that own more tangible assets and whose GAAP earnings provide a fair benchmark for real earnings.

All the best.

[Ogg]

Decent post Ferg.

I agree with what you are saying.

Everyone is well aware of the "bad news", and so the share price has been reset.

The question is "what next"?

As a stand only business, over the long term, it looks like an average investment. Not great given the risks and uncertainty but not bad given the discounted price. Some investors are probably asking why bother taking the risk for an average return, especially if you have to wait a long time.

The game changer is a merger. By merging with a telecommunication company (like Vodafone) it can remove the "capital risk". By merging with a content creator (like Discovery Inc) it can remove the "content risks".

You're taking a gamble buying this stock but I think the odds are in your favour, as the balance sheet is clean after the $159m placement so the company will be able to at least tread water while a suitable "partner" can be arranged. Hopefully at an attractive premium price, sooner rather than later, thus avoiding the long risky wait for an "average return".

[mistaTea]

Decent post Ferg.

I agree with what you are saying.

Everyone is well aware of the "bad news", and so the share price has been reset.

The question is "what next"?

As a stand only business, over the long term, it looks like an average investment. Not great given the risks and uncertainty but not bad given the discounted price. Some investors are probably asking why bother taking the risk for an average return, especially if you have to wait a long time.

The game changer is a merger. By merging with a telecommunication company (like Vodafone) it can remove the "capital risk". By merging with a content creator (like Discovery Inc) it can remove the "content risks".

You're taking a gamble buying this stock but I think the odds are in your favour, as the balance sheet is clean after the $159m placement so the company will be able to at least tread water while a suitable "partner" can be arranged. Hopefully at an attractive premium price, sooner rather than later, thus avoiding the long risky wait for an "average return".

Purchasing this business because you are hoping for a merger is, imo, not sound investing. If Ferg is a gambler, then that approach would make sense.

There are essentially four key main rules to investing:

1. You have to be able to understand the business
2. The business must have some kind of competitive advantage
3. IDEALLY, the business should be run by honest and capable management
4. And finally, no matter how ‘wonderful’ a business might be - nothing is worth an infinite price. So the price you pay needs to make sense relative to what you expect the business to produce over time given the vicissitudes of life.

Those four rules are outlined by Charlie Munger. They act like hurdles - you don’t move to the next one until the previous step is genuinely satisfied.

It seems clear to me that Ferg has stumbled at step 1. Understanding the business means truly, deeply understanding Sky TV and the industry it operates in, how it makes money etc etc. The fact he was even referring to GAAP earnings highlights a major shortcoming in how he views/understands this business. There is no point moving on to try and analyse the rest until you really understand the business.

So though my message may be blunt in the Charlie Munger fashion, I think I am doing Ferg (and other readers) a favour. Don’t buy the business because the SP ‘looks cheap’, don’t buy it because Ogg is promising a merger, don’t buy it because your mate says he quite likes NEON now (a one up on Wall Street approach)...and if you are an investor (as opposed to a gambler) then if you aren’t prepared to own your share of the business for ten years you have no business owning it for ten minutes.

Good luck to everyone.

[Dlownz]

I’m not as sensible as some of the wise men in this blog, so here is my call, for what it’s worth (which is not much).
1. 29c
2. 38c
3. 70c
4. 55c
Disclaimer, just a complete guess, based upon nothing. Not advice. Dyor.

1. 17c
2. 21c
3. Whens that lol.
4. 19c

[Ferg]

You keep referring to GAAP but I didn't so please do not misrepresent what I said. I used normalised earnings and projections thereon.

That aside, enligthten me. If you aren't going to value a share using NTA (as a floor) or dividend yield or EPS/PE, then enlighten me as to this alternate valuation method. I'm also curious to hear about the "real earnings", keeping in mind I undertook a normalisation approach.

[tqtq]

1. 17c
2. 21c
3. Whens that lol.
4. 19c

Interesting. So you reckon we’ll go back to the CR terp and then for the sp not to move much from there. 3. I hope sometime soon, at least for sports sake.

[mistaTea]

You keep referring to GAAP but I didn't so please do not misrepresent what I said. I used normalised earnings and projections thereon.

That aside, enligthten me. If you aren't going to value a share using NTA (as a floor) or dividend yield or EPS/PE, then enlighten me as to this alternate valuation method. I'm also curious to hear about the "real earnings", keeping in mind I undertook a normalisation approach.

I’m not doing the work for you mate.

2c per share NPAT as you claim sounds very GAAP to me - and in line with the top end of projected profit (pre COVID adjustment which now seems to be a worst case scenario that did not eventuate)

And if you aren’t referring to GAAP and have some concept of ‘normalised earnings’ then Christ only knows what that is because the figures you have touted have absolutely no bearing on how much money the business is actually earning.

All the best, I’m sure you will make the right call in the end based on investing within your circle of competence.

In my experience - if an investment doesn’t scream out at you as blindingly obvious to invest in, you should just move on.

[Ferg]

Decent post Ferg.

I agree with what you are saying.

Everyone is well aware of the "bad news", and so the share price has been reset.

The question is "what next"?

As a stand only business, over the long term, it looks like an average investment. Not great given the risks and uncertainty but not bad given the discounted price. Some investors are probably asking why bother taking the risk for an average return, especially if you have to wait a long time.

The game changer is a merger. By merging with a telecommunication company (like Vodafone) it can remove the "capital risk". By merging with a content creator (like Discovery Inc) it can remove the "content risks".

You're taking a gamble buying this stock but I think the odds are in your favour, as the balance sheet is clean after the $159m placement so the company will be able to at least tread water while a suitable "partner" can be arranged. Hopefully at an attractive premium price, sooner rather than later, thus avoiding the long risky wait for an "average return".

Thanks Ogg. I agree the Balance Sheet looks stronger but I'm picking another goodwill hit - I realise that is intangible and does not impact the NTA and/or future earnings but as a raw headline it will be uncomfortable reading for the average uninformed punter. Whilst we will see a benefit to interest costs due to debt reduction, this will be muddied by IFRS16 in future results (albeit with a reduction in some opex).

I agree it looks cheap compared to historical prices, but we are looking at a business where the number of shares on issue has ballooned from 389m to 1.78b. Anything divided by 1.78b is going to be a small number - as you say "what next" and I ask how small? This could be restored with a share consolidation but that's just shuffling deck chairs. A takeover would be the white knight, assuming regulatory approvals can be obtained. The only way I can see cash being released is by not replacing an aged asset base, which is a no growth scenario with its own issues. A common phrase in TV is "the trend is your friend" - and the trends are not good at the moment. They will turn, but it's a case of when and at what value and who has the biggest kahunas to see this out. I believe capital injections and/or share issues will be needed for acquisition growth, whereas organic growth isn't there. IMO that's a hard sell to investors.

Happy to be proved wrong. I could write more but I need to keep my posts short.

[Ogg]

We need to wait until results to have decent arguments, otherwise we're just debating old news. This company is going through change fast so it's hard to keep up with the most recent statistics. It should really be reporting every quarter, not 6 months.

Until then, it's all about "themes". If you believe the recovery "story" then invest. If your a "numbers" guy you need to wait until results before investing.

Recent themes:

- Recent trend in streaming post Covid-19 (ie lightbox merger etc)
- The sports renegotiation processes, has the company saved lots of money?
- Satellite churn given the amount of advertising Sky has been doing recently. Are people happy staying at home now?
- Update on restructure, how many people have they fired.

With the cost savings, growth in streaming, reduced satellite churn, and $159m placement, it should provided a decent "results" for people to digest and get their teeth into.

What I'm really looking for in the results: "is Sky maintaining it's market position as a leading player in NZ media." If answer is "yes" (which is likely), I'm happy.

[Dlownz]

Interesting. So you reckon we’ll go back to the CR terp and then for the sp not to move much from there. 3. I hope sometime soon, at least for sports sake.

Its a hard stock to guess. When it was 65 cents did that not seem too cheap. Divided by 3 equals almost 22 cents a share. I would like to see this back to 30cents a share would would equal 90 cents a share. Let's hope.