SKT Sky Network Television Limited.

[LaserEyeKiwi]

So what do we think is a realistic Sustainable Dividend for SKT to be paying going forward?

I’ll admit my initial plan was to cash out at or above $3.00, but I might be tempted to stay in long term if the dividend situation is good.

I have said above that I don’t think Sky will be able to sustain an EV/Net Income multiple above 10, but the upside of that belief is that they should be able to offer a very high dividend in that situation.

I would happily stay in the stock if it was paying an 8% dividend yield. Which would be a 24c dividend on a $3.00 share price, at a cost to the company of $42 million.

[mikelee]

Yes, my sentiment was similar. Anything over 20c per share would be great, especially in this lower interest environment. I'd probably never sell and just live off this passive income when I retire. Only a takeover would terminate my ownership of SKY.

[mistaTea]

So what do we think is a realistic Sustainable Dividend for SKT to be paying going forward?

I’ll admit my initial plan was to cash out at or above $3.00, but I might be tempted to stay in long term if the dividend situation is good.

I have said above that I don’t think Sky will be able to sustain an EV/Net Income multiple above 10, but the upside of that belief is that they should be able to offer a very high dividend in that situation.

I would happily stay in the stock if it was paying an 8% dividend yield. Which would be a 24c dividend on a $3.00 share price, at a cost to the company of $42 million.

Once they have finished with all the majot 'growth' initiatives their CAPEX requirements should be modest. Hirst pointed out that "keep the lights on" CAPEX for Sky is only actually around $10M-$15M...yet total CAPEX is around $40M-$50M (the $25M-$30M difference being spent on 'Enhance' and 'Growth' iniatives).

For Growth, they have already set up Sky Broadband...and have done the bulk of the spending on the new STB (to be released by June 2022, with pilot groups happening from the beginning of next year I believe). So what else is there for them to realistically spend serious money on for growth? Sky Mobile seems like a likely candidate...but beyond that, I am not sure there are many other 'obvious' choices that have good synergies. Setting up Sky Mobile would probably be a $10M-$15M project so easily affordable.

Ultimately, once a business has done the bulk of their 'growth spend' I would think they would have a high payout ratio of 75%-90% of FCF.

FCF will probably settle in the $50M-$60M range.

So if we take the lower end, then we could expect a payout each year of $37.5M to $45M (so your expection seems very reasonable).

If the market agrees that this is sustainable and might even, dare I say it, have scope to grow...then I would think a yield of 5% is realistic (consider the NZME - a business that has faced similar challenges to Sky, is valued based on a yield of 2.8% right now...).

A 5% yield on a $40M dividend is $800M. That might seem very lofty from where we sit now given the market cap is $470M...but then again, if I had of said even a couple of months ago that Sky would go into the Xmas break with a valuation near $500M I would have been laughed out of the forum...

[LaserEyeKiwi]

Once they have finished with all the majot 'growth' initiatives their CAPEX requirements should be modest. Hirst pointed out that "keep the lights on" CAPEX for Sky is only actually around $10M-$15M...yet total CAPEX is around $40M-$50M (the $25M-$30M difference being spent on 'Enhance' and 'Growth' iniatives).

For Growth, they have already set up Sky Broadband...and have done the bulk of the spending on the new STB (to be released by June 2022, with pilot groups happening from the beginning of next year I believe). So what else is there for them to realistically spend serious money on for growth? Sky Mobile seems like a likely candidate...but beyond that, I am not sure there are many other 'obvious' choices that have good synergies. Setting up Sky Mobile would probably be a $10M-$15M project so easily affordable.

Ultimately, once a business has done the bulk of their 'growth spend' I would think they would have a high payout ratio of 75%-90% of FCF.

FCF will probably settle in the $50M-$60M range.

So if we take the lower end, then we could expect a payout each year of $37.5M to $45M (so your expection seems very reasonable).

If the market agrees that this is sustainable and might even, dare I say it, have scope to grow...then I would think a yield of 5% is realistic (consider the NZME - a business that has faced similar challenges to Sky, is valued based on a yield of 2.8% right now...).

A 5% yield on a $40M dividend is $800M. That might seem very lofty from where we sit now given the market cap is $470M...but then again, if I had of said even a couple of months ago that Sky would go into the Xmas break with a valuation near $500M I would have been laughed out of the forum...

Unless I am mistaken (and I may well be) I think most of the ongoing CAPEX cost for SKY in relation to the new STB (and possibly also for SkyBroadband) is the actual hardware that gets sent to every user. So Capex for the new STB will remain very high until the majority of the userbase has transitioned to it.

A STB that is rented too subscribers is classified as an asset rather than an expensed item, so it stays on the balance sheet and the cost of it is included in Capex (and will be a depreciation expense over a long timeframe). So hypothetically if the new STB costs sky $200, then distributing 50,000 of them will incur $10 million in CAPEX spend upfront. So transitioning 500,000 users to them will cost $100 million in capex.

[mistaTea]

Unless I am mistaken (and I may well be) I think most of the ongoing CAPEX cost for SKY in relation to the new STB (and possibly also for SkyBroadband) is the actual hardware that gets sent to every user. So Capex for the new STB will remain very high until the majority of the userbase has transitioned to it.

A STB that is rented too subscribers is classified as an asset rather than an expensed item, so it stays on the balance sheet and the cost of it is included in Capex (and will be a depreciation expense over a long timeframe). So hypothetically if the new STB costs sky $200, then distributing 50,000 of them will incur $10 million in CAPEX spend upfront. So transitioning 500,000 users to them will cost $100 million in capex.

I think the new STB is based on something similar to this:https://www.pbtech.co.nz/product/DVA...4K-Ultra-HD-St.

In which case I would expect the box to cost no more than $100 a pop for Sky...hopefully less. The CAPEX they have incurred for the customisations/software changes is a separate thing.

In which case the initial upfront cost to Sky for the boxes will be $10M for every 100K boxes...how much that cost ends up being in a given year will depend on how the uptake is. Based on Sky's projections for the uptake, I think the ongoing CAPEX will be reasonable if not modest. So if they budgeted, say, $20M for the new STB in FY22...customising/configuring and testing the new box should cost $5M? Open source software...it is Google so highly configurable etc...I would have thought $5M would be a tonne of money to do customer research, UI design work, select a vendor, change the software, do proof of concept surveys with your customers, roll out etc etc. Depending on unit cost, that would leave enough kitty to have 150K-200K boxes ready to rock and roll (or enough for a solid 35% of the base to switch over to).

And then those costs are recouped over time because we will either maintain some form of STB rental fee or update our Bundle prices to factor it in. FCF may well take a hit if the box is very popular (a good problem to have!) but longer term the cash rolls in and the CAPEX tapers off and drops so we can enjoy dividends that grow.

I am not sure about Broadband...I would have thought the cost of the modem is taken care of within whatever wholesale fee Orcon has with Sky.

[LaserEyeKiwi]

I think the new STB is based on something similar to this:https://www.pbtech.co.nz/product/DVA...4K-Ultra-HD-St.

In which case I would expect the box to cost no more than $100 a pop for Sky...hopefully less. The CAPEX they have incurred for the customisations/software changes is a separate thing.

In which case the initial upfront cost to Sky for the boxes will be $10M for every 100K boxes...how much that cost ends up being in a given year will depend on how the uptake is. Based on Sky's projections for the uptake, I think the ongoing CAPEX will be reasonable if not modest. So if they budgeted, say, $20M for the new STB in FY22...customising/configuring and testing the new box should cost $5M? Open source software...it is Google so highly configurable etc...I would have thought $5M would be a tonne of money to do customer research, UI design work, select a vendor, change the software, do proof of concept surveys with your customers, roll out etc etc. Depending on unit cost, that would leave enough kitty to have 150K-200K boxes ready to rock and roll (or enough for a solid 35% of the base to switch over to).

And then those costs are recouped over time because we will either maintain some form of STB rental fee or update our Bundle prices to factor it in. FCF may well take a hit if the box is very popular (a good problem to have!) but longer term the cash rolls in and the CAPEX tapers off and drops so we can enjoy dividends that grow.

I am not sure about Broadband...I would have thought the cost of the modem is taken care of within whatever wholesale fee Orcon has with Sky.

I think it will be quite a bit more expensive than the unit you linked too for two reasons: It will have to also have all the satellite signal input and conversion hardware, and also will need a very large amount of storage for recordings (the unit you linked to only has 8GB storage, which is practically nothing and is only enough for the OS and some apps (and hopefully some buffering), whereas something at least approaching what the current MySky box offers will need 128GB+ at a minimum one would think. Hopefully it is less than $200, but not sure.

Anyway it is perhaps prudent to maybe not expect both a big capital return AND a big dividend guidance in Feb, but instead one or the other (unless they are prepared to carry some debt again). Although I suppose they could do a one off upfront capital return, and then guide for the dividend to be paid in 12 months time - leaving them with plenty of cushion for capex spending.

[mistaTea]

I think it will be quite a bit more expensive than the unit you linked too for two reasons: It will have to also have all the satellite signal input and conversion hardware, and also will need a very large amount of storage for recordings (the unit you linked to only has 8GB storage, which is practically nothing and is only enough for the OS and some apps (and hopefully some buffering), whereas something at least approaching what the current

Sure, but it ultimately depends on the type of contract they have signed and what the pricing model is.

If customing a STB to accept a satellite feed, update the UI so it is more condusive to the ideal "Sky experience" that should all come under the 'system changes' budget that is a one-off.

For the storage...we would need 1TB...so perhaps the unit cost of the "bigger box" is more expensive...but Sky will have a wholesale rate as part of their contract for that...maybe I am underestimating the cost a bit...but I would be shocked if our wholesale rate was anywhere near $200 a pop.

[cyclist]

Not a lot of margin in those sorts of devices (when thinking of retail versus wholesale rates). Considering that many (all?) full PVR type devices are $350+ retail, I think $200 each is a very realistic minimum cost. The hard drive alone is worth about $80.

[mistaTea]

Not a lot of margin in those sorts of devices (when thinking of retail versus wholesale rates). Considering that many (all?) full PVR type devices are $350+ retail, I think $200 each is a very realistic minimum cost. The hard drive alone is worth about $80.

Well Vodafone TV retailed for $179 and $119 when on special.

Ok, it didn’t have a hard drive…but those are retail rates.

Maybe I am underestimating the cost here a tad…but I just felt when I see some of these new boxes and what they retail for etc that the cost has come way down.

I have no idea why those PVR boxes have such a high retail price. I assume it’s because they sell so few of them that they need a much bigger margin to justify stocking the product.

Still, I would be very surprised if sky was paying anywhere near the order of $200 a box.

[Jay]

Was it $199 or $299 they were saying as a guide one-off price in those surveys about it cannot remember, thought it was the latter