BSkyB: Still good value

Investment bank Morgan Stanley, in a note to clients, reminds investors that BSkyB is delivering a  “resilient operating performance”. Despite the high-profile traumas of the past few months, BSkyB just goes rolling along, delivering “solid top-line growth….improving margins…. and a “natural reservoir of growth given that only 28 per cent of Sky’s customers take its triple play offering”.

While BSkyB’s UK rivals (notably Virgin Media, and broadband operators) are busy raising prices, Sky has frozen its prices for the next year. “With a strong value proposition Sky has good medium term pricing power,” says Morgan Stanley. Moreover, Sky’s two recent investment cycles (HDTV and broadband) are now over, allowing more profits to flow to the bottom line.

There are problems, of course. “There is a medium term unbundling threat produced by ‘must wholesale’ and the advent of YouView in 2012.Netflix also plans to launch in the UK in 2012 (Lovefilm already operates a monthly streaming service at £15 per month in the UK). If 10 per cent of Sky’s 5 million Sky Sports customers rolled off, the net reduction of revenue and profit could be £167 million or 14 per cent of EBITA in 2011/12,” says the bank’s note.

The bank isn’t too bothered about the threats to Sky from News Corp recent negative reports: “i) There is no direct effect on BSkyB (ii) We see no desire by NewsCorp to reduce its stake in BSkyB (iii) NewsCorp might come under pressure to sell all or part of its stake in BSkyB with OFCOM looking at the ‘fit and proper’ test but we think this unlikely,” says the bank.

The bank’s raises its advice to investors, upgrading BSkyB to “overweight” and with a share price target of £8.

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