Daily ShareChat: Sky TV

Sky Network Television is in danger of developing "an embarrassment of riches" with an extremely under-leveraged and inefficient balance sheet with estimated gearing of just 12% by June 2014, says Sarndra Urlich, an analyst at First NZ Capital.

Sky isn't in the mature stage of its life cycle but its ever-increasing operating cashflow and a normalisation of capital spending is likely to yield a free cashflow surplus in the order of $190 million for the year ending June 2014, Urlich says.

Comparing the pay TV company with its peers implies it could easily take on an additional $300 million to $400 million in debt, she says.

"Even better, Sky has the capacity to [tax efficiently] gear up its balance sheet through increasing its payout ratio from 60% to 100%, paying out a special dividend .. and by undertaking a share buyback," she says.

"By our estimates, Sky could combine all of these measures and still maintain a robust balance sheet."
The key challenge though is Sky's 43.7% major shareholder News Corp isn't "renowned for returning capital to shareholders, preferring to grow rather than shrink its asset base."

Something needs to be done to engineer a more efficient balance sheet. "The alternative, of course, is that this embarrassment of riches makes Sky a very attractive corporate target."

Recommendation: Neutral.

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