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Sky: ‘Time to revisit’

Yesterday’s news that Sky has signed a pan-European agreement with US premium programming giant Showtime (itself part of the CBS/Viacom empire) is more good news for the pay-TV broadcaster.

The news helped balance what is proving to be a challenging pre-results period for Sky. Equity analysts are concerned over how well Germany and Italy are doing in the Sky trio of business units, and not helped by anxieties that Sky’s UK business is – at best – maturing and might even be matured. Back in July 2015, Sky’s London share price was looking good at £11.41 (€15). January 21st saw trading £10.09 (albeit at a tough time for media stocks generally). Sky’s share price has fallen more than 6 per cent since the start of the year.

Analysts are expecting Sky’s numbers (expected in detail on January 29th) to slow gently over the period to 2019. Deutsche Bank is not quite so pessimistic, but in a note to clients says that the market is missing the fact that Sky – in the UK and Ireland – is getting increasingly good at selling more things to the same people, and is less focused on selling the same products to more people.

The bank says it expects 2Q (the trading period ending December 31st 2015) “to show a subs base able to support further price rises; 135k TV sub additions, churn remaining at all-time lows, broadband adds not slowing at 90k. New online revenue streams, enabled by Sky’s investment in connected devices should drive 30% growth in transactional revs. Triple play has further to run at 40% penetration. Mobile and SkyQ have yet to impact.”

The bank also expects a cellular service launch which will help the overall ‘quad play’ offering. “SkyQ should be margin accretive,” says Deutsche Bank. “More importantly, selling more services into the base, not chasing subs growth means acquisition costs are falling and Sky is also generating savings in subs management. This means margins can rise, not fall as consensus has ’16-’18.”

For Germany, the bank expects a slowdown in subs growth and higher churn, and states bluntly that Sky Germany’s two-year subscription policy was “an error”.  “We are cutting [Germany/Austria] net additions and EBITA forecasts (FY16 EBITA from €39 million to €26 million). Conversely, we expect Italy to show little impact from Mediaset Premium’s Champ’ League launch. We had been concerned about an aggressive cost response from Sky. This looks less of a risk;  2016 EBITA rises €55 million to €70 million. Remember the context; UK EBITA is £1.4 billion. We are still 4%/9%/20% ahead of consensus EPS (source company) on ‘16/17/18.”

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