Analyst's bold punt on Sky TV as shares hit record low

Sky TV chief executive Martin Stewart in front of his company's new logo, which was unviled at its annual results. Photo / Jason Oxenham

Sky TV shares may have hit a record low of $1.13 yesterday the pay-TV provider suspended its dividend, and revealed another fall in revenue and profit with its full-year result.

But the stock will rebound to close to $2 over the next 12 to 18 months, Fat Prophets research head Greg Smith predicts.

"Armageddon is already built-in to the price," he said.

So any good news now should see the stock rise. And he saw some stirrings at the pay-TV provider's full-year result as Sky made its first gain in subscriber numbers in three years as the rise in online outweighed the fall in its satellite business.

He had one proviso, however, Sky TV needed to prevail in its battle with Spark for Sanzar Super Rugby and Rugby Championship rights post-2020 - a proxy for Sky's coming fight with Spark as several major codes' multi-year deals come up for renewal over the next 12 to 24 months.

But to stockpile funds for the sports rights battle to come, Sky TV suspended its dividend, and new chief executive Martin Stewart could not say when it would resume.

The axed second-half payout left the total dividend for the year at 7.5 cents per share against the year-ago 15cps and the 27.5cps paid in 2016.

Smith conceded that in the short term, retail investors looking for high-yield stocks as the OCR melts down could take fright - and that Sky's suspension was a marked contrast to Spark, which yesterday held its full-year dividend at 25 cents per share, and pledged to keep it at the same level in 2020.

Take fright they did.

Sky shares, which had already halved in value over the past year, sank 7.3 per cent to a record low of $1.14 after the result was announced (they recovered slightly to finish at $1.18 but are still 55 per cent down for the year).

Sky's shares should rebound to $2 if it can hold Super Rugby rights, says Greg Smith, head of research at Fat Prophets. Photo / Jason Oxenham

Smith buys into Stewart's short-term pain, long-term gain argument. The Sky boss told the Herald that using funds to holding Sanzar rights and making gains in streaming would ultimately create more value than that lost through the dividend suspension.

Sky's new boss has already flagged that he will fight hard for rights. His company recently signed a multi-year deal with Cricket Australia, which includes the iconic Boxing Day test that had attracted Spark's attention.

"If someone outbids us, they're going to go broke," he said last month - indicating he would suck up losses in an effort to scare Spark back to its traditional telco business - somewhat of a change in approach from his predecessor John Fellet, who would never pay over-the-odds for any given piece of content.

The doomsday scenario, however, would be if Sky TV successfully saw off Spark, after a couple of years of ruinous rights bids, only for another player like Amazon to swoop in for the next round.

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Stewart also touted his company's acquisition of Rugby Pass for up to $62 million as a path to growth. Rugby Pass holds Sanzar right in 60 countries. None of them are top rugby nations, but collectively they have given it more than 20,000 paying subs to its US$15 a month streaming service, with founder Tim Martin predicting that number will double early next year. Ultimately, Martin is targeting two to three million paying Rugby Pass members around the globe.

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Suspending its dividend isn't the only way Sky is rustling up funds for its coming sports rights fight with Sky.

Stewart said Sky - which paid down $43m in debt to $189m during FY2019 - had established a new $200m banking facility.

The new credit line would be used to make an initial US$10 million payment for the Rugby Pass acquisition, the Sky CEO said. Rugby Pass' owners - the largest of whom is rich-list Britomart developer Peter Cooper - will also get US$20m in Sky script and be in line for a US$10m earnout.

It was notable that Stewart immediately elevated global streaming - in the form of Rugby Pass - to the status of one of Sky's three strategic planks, the other two being its traditional satellite business and its domestic streaming business via Fanpass and Sky Sport Now (formerly Fanpass).

Jarden head of research Arie Dekker saw potential in the Rugby Pass acquisition, though he saw it more as an independent investment than a central plank.

"Sky sees an opportunity to drive value from growing a subscriber model in secondary rugby markets globally," he said.

"The business has some good traction and is targeting a market that flies under the radar but it is early days with regards to commercialisation," he told the Herald.

(Dekker had an out-perform rating and a $1.74 12-month target on Sky ahead of yesterday's earnings announcement; both are still under review.)

But even as it pushes beyond NZ's borders in sport, Sky faces a domestic incursion from Disney - whose Disney Plus app is now confirmed to launch here in November, breaking Sky's long-time monopoly in Disney content. He said it had yet to be resolved which Disney content would be on Sky and which on Plus.

Stewart conceded that Disney Plus' arrival - part of a wider trend of direct-to-the-consumer apps that also includes the new HBO Max - was one of the reasons that Sky took a $670m goodwill impairment - a paper writedown that pushed it to a full-year net loss of $607.8 million (on an adjusted basis, Sky made a $97m net profit against last year's $119m).

Disney's decision to sell Plus in a US12.99/month bundle with Hulu and ESPN+ in the US has rightly sent a chill down rivals' spines.

Dekker says get used to it - there's more where Disney Plus came from.

"Sky has been facing competition in entertainment for the last five years with Netflix and others creating competing offers at price points that one could argue have commoditised such content and had a negative impact on Sky subscriber numbers," he said.

"The loss of content from its platform and exclusivity to the likes of Disney is inevitable. If that business model is successful then we would expect further fragmentation which will negatively impact Sky."

The answer? Sport.

"Sky's key asset is its sports rights incumbency and we expect to see it focus there," Dekker said.

Ahead of the full-year result, Forsyth Barr rated Sky "under-perform" with a 12-month target of $1.56.

More subs, less money per sub

Analysts Matt Henry and Matt Dunn were picking a gain in subscribers to Sky's two streaming services, Neon and Sky Sport Now, but the jump revealed yesterday outpaced their expectations.

Total subscriber numbers increased 1 per cent to 779,000 from the year-ago 768,000 as numbers using Sky's Fanpass and Neon apps jumped 50 per cent.

Within the 2019 total, a fall in satellite customers from 661,000 to 618,000 was offset by an increase in streaming customers from 107,000 to 161,000.

It was the first time total subscriber numbers have increased since a highwater mark of 852,679 was reached in 2016.

But the fact the streaming apps are cheaper than satellite plans meant overall average revenue per user per month sank from $77.73 to $74.84.

An artist's impression of how the cake tin will look after January 1, when "Westpac Stadium" will become "Sky Stadium." Image / Supplied

Post-result, Henry and Dunn - who had no immediate change to their rating - said it was positive that subscriber numbers had ticked up for the first time in three years.

"We believe Sky embracing streaming is the right strategy," the pair said this afternoon.

"But the result is considerable uncertainty on the outlook for revenue, margins and investment. This uncertainty is compounded by the pending re-contracting of key supporting rights for rugby, cricket, and league."

And the old maxim that investors hate uncertainty was born out yesterday as Sky's shares sank to a record low.