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Sky’s position expected future profits growth and market leading position remain unchanged
What a difference a week makes. Having been buoyed the UK government positive words in early March - suggesting an approval of News Corp’s highly publicised takeover bid - the share price of British Sky Broadcasting Group (LON:BSY) moved to a high of £8.50 in early July. One week later with News Corporation withdrawing its bid as politicians piled on the pressure, the share price fell to below £7. Before the phone hacking scandal Sky’s share price had been steered solely by the impressive financial performance of the business. After a decade of investment revenues now rise faster than costs and as such Sky looks set to produce robust profits growth in the years ahead. Recently released Q3 results which give in total the financial results for the 9 months to the end of March confirm this view. During Q3 - three months to the end of March - the company saw 51,000 net customer additions which took the total subscriber base to 10.15 million. Net product growth was much higher at 801,000 as existing customers took additional products like HD TV and telecom services like broadband. Looking at the valuation and expectations are for earnings per share of around 39.4p for the financial year ended June (FY results to be announced 29th July). This puts the group on an historic rating of 17.7 times but for year ahead EPS is expected to come in at around 47.4p which means the group trades on around 15 times earnings. This is as profits are expected to continue to grow in the year ahead reaching around 60p in the year to the end of June 2015 which would put the P/E on around 12 times. Thus around £7 Sky is not expensive given its dominant market position and stable growth. The improving net debt position and robust cash generation also suggests that now the bid has fallen through a special dividend could be paid out. Certainly the group would be able to handle higher debt levels than it currently has. The ability of Sky to grow revenue faster than costs is as it increases subscribers, cross-sells more products to existing subscribers to boost customer spending and innovates to create new services. Growth of net customers shows Sky is competitive and that the pay-tv model looks to be a winner within its space. There is little doubting Rupert Murdoch’s determination but for once much of the political establishment has lined up against him. However, Sky’s position expected future profits growth and market leading position remain unchanged.
This report was produced by Senior Research Analyst, Andrew Latto.
