Analyst lowers Sky TV forecast

Forsyth Barr has lowered its forecasts for Sky TV [NZX:SKT] earnings due to an increase in costs, but has retained its buy rating.

It noted Sky Television’s profit guidance for the 2012 financial year at its annual shareholders meeting was “well below” consensus forecasts, due to an increase in short term operating costs to support stronger than expected growth.

This growth consisted of an extra 15,000 subscribers in the September quarter 2011, boosted by having the rights to broadcast the Rugby World Cup for the first time, Forsyth Barr said.

It was matched by households upgrading to MySky, Forsyth Barr said. 

“Over the past couple of years Sky TV’s growth has been driven from upgrading households to MySky, which is a relatively low cost to install, but does have higher capital cost.”

This strong growth and consequent increase in operating and depreciation costs had led to Sky’s FY12 profit guidance being below consensus forecasts, Forsyth Barr said. 

This guidance, of $337.5 million, saw Forsyth Barr’s FY12 ebitda being lowered by $10.1 million to $344.3 million and reported profit lowered by $17 million to $125.9 million.

“While it is disappointing to be lowering our forecasts, at least the reasons for the lower guidance are to support stronger growth and do not reflect weaker economic conditions or a slowdown in its business.”

Forsyth Barr said this shift in business to upgrading to MySky had made it difficult to forecast revenue, operating costs and capex but that Sky Television had increased its mySKY inventory to 140,000 units, comprised of 10,000 to replenish inventory, an additional 110,000 MySky households and 20,000 new multi-room  or mySKY households. 

This was 20,000 decoders higher than Forsyth Barr had factored into its forecast, which meant its capex forecast of $138 million for FY12 was lower than Sky’s guidance of $145 million.

The extra 140,000 decoders had caused Forsyth Barr to increase its forecast for depreciation by $12.6 million, which lowered its FY12 EBIT by $22.7 million to $207.5 million, Forsyth Barr said.

Other operating costs included ongoing development supporting isky.co.nz and a step-up in programming costs, including the RWC 2011 and the launch of a new channel, SOHO, along with new content on MTV, incurring $3.5 million in programming costs, Forsyth Barr said.

However the company said Sky TV was well positioned for growth, with demand for mySky continuing to exceed expectations, online offering of iSky and ongoing net subscriber growth of over 30,000 per year being achievable in the medium term.

“Sky TV has spent the past three years investing in its product/software and content to deliver all of its key services, fully funded out of free cashflow (FCF). It has increased its dividend payout and now resembles a dividend growth utility.”

It said the earning per share (EPS) was still forecast to grow by 15% per annum over the next few years, with a breakdown of 5% in the financial year 2012 and 25% in the financial year 2013.

Forsyth Barr’s recommendation was therefore to accumulate.

Sky Television chief executive John Fellett said Sky Television was spending money to make money. 

He said the costs of new subscribers, of launching SOHO, a stand alone channel which would be the most expensive channel Sky had ever launched and of Sky’s taking on of another transponder with Optus, had affected Forsyth Barr’s forecasts since Sky had briefed attendees at the annual meeting.

“Normally people downgrade earnings because revenues are down or expenses are way up higher than they anticipated.  In this particular case it’s Sky is investing to grow the business faster, but there’s a price to pay for that in the short term.”