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BSkyB
H108 preview and 3% cut to 2008E EBITA
H108 results should be about maintaining growth momentum
We forecast 170k net adds and churn of 10.3%. This implies that gross adds will fall 10% yo-
y, indicating that growth is becoming harder to come by. Whether this is consumer related,
due to competitive factors, or due to execution issues in Q208 remains to be seen. If we are
right, the legitimate concern will be that the risk to estimates is increasing to the downside as
marketing cost pressures will increase, depressing the stock's performance: we retain our
Hold, with the stock trading at a significant premium to the sector (16x CY08E PE).
Sky H108 results due 6thFebruary
Sky is to report H108 earnings at 7.00am on 6th February. We forecast 170k net adds (182k
in H107) and believe that 12 months after cleansing the database of offer riders, churn will fall
to 10.3%, having peaked at 13.5% in Q307. Strong growth in additional services such as HD,
Sky and broadband will push ARPU up to £422 of which pay TV ARPU should increase from
£377 to £386 sequentially. We see pay TV profitability falling 4% in H108 and broadband
losses of £95m (from £73m). We expect EPS to fall, but the dividend to be marginally
increased to 6.8p.
Trimming FY08 estimates
We lower our 2008E EBITA and our TP falls in line to 650p (was 685p). Higher Sky+ net adds
subsidy feeding through to marketing and stronger overhead costs see us cut £20m from
EBITA to £770m. According to the company, consensus has narrowed to £750m-£780m of
EBITA for FY08 from £740m to 3800m at the start of the year.
Valuation – Lowering price target to 650p (from 685p)
We value Sky on a DCF (WACC 8.9%, terminal growth 3%) deriving a core value of 695p
discounted for execution risk to 650p. Sky trades on 16.5x CY08E vs the sector on 11.2x
CY08E, which does not look cheap. Whilst its growth is superior on paper, this relies on
delivery of a significant uplift in CY09 EPS which, based on historic disappointment in
meeting forecasts, is not a given. With the Pay TV review overhanging the shares in CY08,
we rate the shares a Hold. Downside risks include: regulatory threat, return to an EPS
downgrade trend, increased competition for content rights and a weakening economy.
Upside risks include: exceeding our subscriber, ARPU and churn expectations. (See pages 4
for more detail.)
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