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Morningstar says too early to re-rate Sky shares as fibre undermines pay-TV

Thursday 26th July 2018

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Sky Network Television shares have climbed 27 percent from a trough in March, but it's too early to say they're ready for a re-rating with the threat of cheaper and larger online rivals a clear and present threat, according to Morningstar Research. 

The stock is up 2.7 percent to $2.67 today, having climbed from $2.11 in March as investors fretted about how the Auckland-based pay-TV operator would respond to streaming online video services taking their customers and competing more aggressively for big-ticket content such as rugby rights. 

Morningstar analyst Brian Han said that's the first time since early 2017 that the stock has traded above his fair value estimate of $2.50, noting the failure of Optus's streaming service in Australia during the football world cup finals favoured the security of Sky's delivery in the upcoming bid for rugby rights.

"Kiwis' prerogative to watch All Black tests and the Super Rugby competition is such that SANZAAR may recoil at the thought of a telecom or a streaming provider getting the rights and turning the broadcast into an Optus-like buffering fiasco," Han said in a July 25 note. "It is, however, too early to declare the start of a sustained rerating journey for Sky. The upcoming full-year result may provide a reality check." 

Sky TV managed to avoid regulation from successive governments which questioned its dominance in pay-TV but lost its stranglehold on viewers as the roll-out of New Zealand's ultrafast broadband telecommunications network paved the way for new technologies to emerge with cheaper and more customer-friendly services. 

Han said Sky TV has lost its structural advantage that underpinned earnings and projects declining revenue for the next three years with skinnier margins, "reflecting the impact of the maturing pay television market in New Zealand and pressure on ARPU (average revenue per user) and the cost base as new lower-priced products are launched to better compete against emerging players." 

The media group slashed prices and lowered dividend payments to preserve capital as it prepares for its next phase, under a new leader when long-serving chief executive John Fellet retires next year. 

Han said the background of the new CEO is something he's keeping a close eye on, and that the company's longer-term horizon will depend largely on how it finds new revenue streams. 

Morningstar predicts Sky's return on invested capital will settle just below 6 percent, less than the company's weighted average cost of capital of 8.1 percent. That's assuming "management successfully expands beyond the set-top-box to become a platform-agnostic content distributor and further strengthen its programming arsenal," Han said. 


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