SKT Sky Network Television Limited.

**LaserEyeKiwi** · 03-02-2021, 12:01 PM

Originally Posted by mistaTea

Quoted value still way below what it should rationally be even before the earnings guidance increase.

A low-ball, ultra-conservative EBITDA multiple of 4 should be around $700M (40c/share).

The good news is Sky could comfortably pay a total dividend of 4c/share in FY21 (that would represent a payout of roughly 70% of underlying Owner Earnings).

I would still prefer that money being spent on a buyback at these prices, but The Board may issue a dividend in the hope it pushes the SP up more than a buyback would.

If they are going down the dividend route, they may declare an earlier-than-expected dividend at the HY results (1c-2c per share which would be approx $18M - $35M).

Cant really use EBITDA for Sky valuation anymore as the change in NZ accounting standards moves a huge operational expense (Leases) out of EBITDA. have to use EBIT instead for an accurate cashflow/profitability measure.

**Rawz** · 03-02-2021, 12:03 PM

Originally Posted by mistaTea

Actually, they have provided much more revenue certainty.

The top end only increased by $5M, but the low end expectation has increased by $15M.

The earnings increase is in part due to one-off savings but also ongoing OPEX savings. OSB CAPEX savings would have already been baked in before.

Cost control is absolutely critical to Sky’s success as a going concern. The Board and Management have put a huge amount of work into reducing ongoing costs and should be commended for this result (which is far better than anyone, including myself, expected).

Yes I only jest (partly). I see the bottom end expectation increase of $15m as a sign that they didn't lose too many subs over the summer cricket season with spark sport holding the rights for the black caps. Big bash and aussie v india did the job i guess. Well done to sky on that front.

**LaserEyeKiwi** · 03-02-2021, 12:03 PM

Originally Posted by mistaTea

Actually, they have provided much more revenue certainty.

The top end only increased by $5M, but the low end expectation has increased by $15M.

The earnings increase is in part due to one-off savings but also ongoing OPEX savings. OSB CAPEX savings would have already been baked in before.

Cost control is absolutely critical to Sky’s success as a going concern. The Board and Management have put a huge amount of work into reducing ongoing costs and should be commended for this result (which is far better than anyone, including myself, expected).

well said. I'm glad SKT is embracing the new work from home ability forced upon everyone during lockdowns - it will lead to some savings in operational costs.

**mistaTea** · 03-02-2021, 12:50 PM

Originally Posted by LaserEyeKiwi

Cant really use EBITDA for Sky valuation anymore as the change in NZ accounting standards moves a huge operational expense (Leases) out of EBITDA. have to use EBIT instead for an accurate cashflow/profitability measure.

Yes, that is a really good point you make.

Need to reduce EBITDA by ~$30M for the lease costs (which are mostly for satellite costs and represent real cash spent).

Even after making this adjustment (which is taken into account in my Owner Earnings calculation, rest assured)... a conservative multiple of 4 times what we could call ‘pre-IFRS 16 EBITDA’ would still be around $600M (34c/share).

And, of course, a multiple of 4 is very low. Should really be somewhere between 5-7, depending on assumptions.

**Snow Leopard** · 03-02-2021, 12:55 PM

Note that they have $100m of bonds (SKT020) maturing at the end of March.

Wonder whether they will replace them, and with what?

**Ogg** · 03-02-2021, 02:57 PM

30c

🚀

🔥

**BigBob** · 03-02-2021, 03:46 PM

..........

**HCR20** · 03-02-2021, 04:03 PM

I’ve been looking at this for a little while now and thought that I would post some thoughts.

2020 results indicate worsening performance on almost every meaningful financial measure. However, capital raise means that the balance sheet looks good and should hold them till 2023. Overall, and on the basis of my back of the envelope calculation I think that Sky is around 23% undervalued at a 16c share price.

Annual report contained a lot of fluff (e.g. Renewed satellite contract, merging of Neon and Lightbox, most popular local streaming service, increased Satellite subs in last month etc) while glossing over most important info. That is, Satellite customer loss has been stable at around 5% p/annum for at least five years, while Streaming growth has been too variable to infer a trend over the same period. It also appears that for every Satellite customer they loose, they need to attract 4 streaming customers in order to remain revenue natural. What is not clear to me is the magnitude in difference in profit margin between these two services. They point to broadband as being a possible saviour but there are many questions here that remain to be answered. These include: (1) What proportion of their 1 million customers would they expect to convert? (2) What is their point of difference (3) What proportion of their customers are on a current fixed term broadband contact and how will this affect uptake of Sky broadband?

News since the annual report includes: Increased guidance (+), deal with Discovery (+), resignation of Handley (+/-), and CEO sudden resignation (-), Olympics not happening (-). As an aside, it is good that Handley resigned but what remains unclear is who/how was he appointed and retained for such a long period? This is the greater issue/question.

Upside Opportunity

I think that Sky is around 23% undervalued and there is some potential for upside related to being an aggregator of streaming, satellite, sports, and entertainment services. They have a brand that is widely known and trusted.

Downside risks

Sky does not have a good history or reputation in terms of being able to deliver or keep pace with technical innovation. Brand loyalty tends to sit within older demographics. Younger people are more likely to view the Sky brand as something that is associated with their parents or grandparents. Sky has been consistently loosing 5-7% of satellite customers for the last 5 years there is little evidence that this is slowing. Streaming customers have no loyalty and can access offshore providers as easy as local. There is no meaningful local differentiation in this market and referring to this as meaningful is an absolute red herring. I suspect that Sky’s fluctuating streaming numbers relate to the content that they’ve been able to acquire. In particular, big title programmes such as Game of Thrones probably drove Streaming subs. Unlike Netflix et al., Sky has no ability to create to new content. This is a serious risk as other streaming services are spending big $$ on new content. Sky’s ability to succeed in this context will relate to its ability to acquire programming from offshore providers. Who knows how well they are able to do this…

Overall:

Mixed. To some extent, given current valuation, downside risks may already be priced into current share price. The market dislikes Sky because they destroyed capital for so long and they have proved themselves to be poor innovators in a market where innovation has been happening at pace. however, the oversold nature of Sky, is probably based more in emotion than logic, and may mean that the potential for share price appreciation is greater than that of further loss. While there is downside risk, it appears to be significantly less than potential for upside gain. I have serious concerns about their ability to implement a clear strategy over the medium and long term, however some improved profitability and Satellite numbers may see the share price back to near fair value. If I was to buy, my plan would be to get in but get out relatively quickly. Perhaps as the share price meets or slightly exceeds fair valuation (around 23c p/share).

Just my thoughts.