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A Broker's PreView - Stormy Skies Ahead for Sky TV

Overview: The storm clouds forming over Sky TV opened up this week with the share price dropping over 10 percent on Wednesday. This was on the back of the Annual General Meeting (AGM) on Wednesday where the Company forecast 2016 Net Profit after Tax earnings will be up to 11 percent lower than 2015 levels. The changing face of content delivery may be starting to bite.

Pros: Sky TV is not resting on their laurels in the face of changing technology. At the AGM the Company updated us on the progress of their new on demand service, which will be available through My Sky boxes.

This ability to leverage off their current entrenched position is Sky TV’s big advantage in the content delivery war that is building. Sky TV had 48% penetration of New Zealand homes and 851,561 subscribers as at 30 June. Maintaining these numbers will be a major achievement in the face of competition from Netflix, Quickflix and Lightbox.

Cons: This increased competition will undoubtable put a squeeze on margins, and may make it hard for Sky TV to grow their dividend. Although a gross dividend yield of 9 percent may be enough to attract some investors.

We’ve seen Sky TV bow out of the bidding for some major sports of late, including some Golf and Football. As NZ slowly makes the switch to fibre broadband, and the quality of streaming services correspondingly improve, Sky TV will likely face even more competition in the content delivery sector.

Compared to last year, Sky TV is also facing a lower NZD which is further impacting margins. Sky TV essentially an importer of content, meaning any drop in the exchange rate will further push up programing costs.

The ability of content providers to geo-block content (i.e. make it unavailable in certain countries) is also on the wane as internet users become more savvy.

Price performance: Sky TV hit 5 year lows of $4.55 this week, off 24 percent for the year.

Investment outlook: Sky TV will produce strong cash flows and reward investors with solid dividend for the next few years. The long term will depend on how the Company reacts to the evolving market place they are operating in.

Grant Davies
Investment Advisor
Phone: 03 353 0795
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*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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