Investors generally are pricing in Armageddon for the satellite TV operator.
Investors generally are pricing in Armageddon for the satellite TV operator.
COMMENT:
Sky Network Television is arguably a textbook lesson of the perils that can befall a company when it rests on its laurels, treating customers and the threat of disruptive competitors, with complacency.
This has effectively conspired to see the shares lose around 80 per cent of their value sincethe highs in 2014. Over the same period the NZ50 has almost doubled.
A consistent under performer over the past five years, it is no surprise that few in the investment community are prepared to back a revival in Sky's fortunes. This is also as 'Herds' tend to seek safety in numbers, and it is far easier a thing to back any number of market darlings.
I myself admit to being in the bear camp on Sky TV for many years, a view reinforced by my own personal experience with its customer service, or lack thereof. However, and while the share price would say otherwise in 2019 (down 35 per cent year to date), there are signs that the winds of change are blowing the right way.
I caught up with the still relatively new CEO Martin Stewart recently, and explained how we regularly seek out unloved stocks, which most of the market 'hates' but where there are legitimate grounds for a revival, and often in situations where new management have come on board. "You mean companies like us" he quipped.
His openness was refreshing, as was his commitment to improve relations with customers, investors, suppliers, and staff. Stewart has been quick to appreciate where the company has failed, and while wanting to reinstall Sky as the 'home' of sport, contrary to media reports, his first question was not 'who lost the Rugby World Cup rights?'
Rome wasn't built in a day, and neither will Sky be 'refashioned' in one, but there is clearly the commitment to do so. And the fact the company boasts one of the highest market penetration rates (43 per cent, with 750,000 paying customers) of any satellite provider globally means that it is not starting at ground zero.
Has Sky finally learnt from the misdeeds of the past?
The disruption that Sky has faced from the likes of Netflix, Amazon, and Lightbox is obvious, but subscriber churn is slowing down, and thanks to a number of long overdue initiatives by new management.
Moving to a more flexibly pricing structure was an important step, as was the likes of dropping the HD fee. The recent decision to abandon the Rugby channel also suggests that management has optimisation (and potentially a rebranding) of its product offering in mind.
Nonetheless a high penetration rate (and still unrivalled offering in live sports) means that Sky can maintain a relatively strong average revenue per user (around $75 at last count).
Offering a lower price point however is also key to getting new subscribers in (or back in) the door. A noteworthy point missed by some from the last results was that 50 per cent of new Sky subscribers already have Netflix – this shows how commoditised the space has become with many subscribers having room for multiple competing offerings.
With increasing competition (and for marquee sports events in particular), rising, programming costs (now around 40 per cent of revenues), is something that management will clearly be 'watching' closely.
There is however a time and place for Sky to be a 'price chaser' and rugby rights will be up there. On that note, (and given Spark Sport's outages in recent events such as F1, hockey, rugby), a failure to properly deliver the RWC could do much to dent the success of Spark's own land grab. This however is not something Sky can rely on.
Sky TV chief executive Martin Stewart.
An increased move to 'digitise' should also reap rewards in our view, and although the 'dish' offering is not going anytime soon, developing an 'internet friendly' set top box will be paramount to Sky finally moving with the times. Pushing the Fan Pass app more also should prove the right call.
Many of these changes wouldn't have happened under the 'old guard' and it is refreshing that most have largely been moved on (excepting chairman Peter Macourt). Stewart has continued to build a well-heeled team around him, with the latest arrival being Blair Woodbury as CFO, who was previously involved in the spin out of Chorus from Spark,
From a valuation point of view, Sky is trading on just two times EBITDA (pegged at $230-235 million for FY19) and six times earnings (with a 10 per cent dividend yield). This suggests that investors generally are pricing in Armageddon for the satellite TV operator. But debt has been going in the right direction, and initiatives continue to ramp up to arrest the earnings attrition.
I could be wrong, but I think there is legitimate evidence that Sky has finally learnt from the misdeeds of the past and has already 'lifted its game' in many areas. Will anyone notice? We may have to wait till the full year results in August, and maybe even longer, but certainly the bar of expectation is set very, very, low.
