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Sky Europe: Italy and Germany to drive growth

May 6, 2015

On April 21st Sky revealed its quarterly numbers (group revenues up 5 per cent for the 9-months (at £8,453 million), and group EBITA up 20 per cent to £1,025 million). A fresh 21-page overview of Sky’s overall performance was issued May 6th by investment bank Jefferies, and saying that Sky’s growth drivers are in transition.

Indeed, taking a three-year view the bank says that it is Sky’s German and Italian division which are now the main contributors to its growth forecasts.  The bank says: “We forecast that Sky will struggle to grow UK operating profit over the next 6 years (spanning two complete EPL rights cycles). Between FY14/15 and FY20/21, we model an EBIT CAGR of just 1.5 per cent with margins declining by an aggregate 370bp (reaching 13.6 per cent in FY20/21).”

On the upside of Sky UK’s prospects the bank highlights profit divisions and how the broadcaster is “enhancing TV”.  “There are high-margin contributors to Sky’s growth outlook such as AdSmart and selling Sky content passes to new addressable segments (including NOW TV and TalkTalk subs). However, these are not revenue streams that contribute the bulk of our growth forecasts,” adds the bank.

For Italy, the bank assumes solid growth and margin expansion. “This would be quite a transformation for a business that has struggled to grow over several years and remains loss making more than a decade after its predecessor companies came into existence. Historic woes have tended to be attributed to Italy’s weak macro situation, although Sky has benefitted from visibly superior content, capital constraints at Mediaset Premium and TI making limited headway with its ‘CuboVision’ pay TV project.”

“Sky Deutschland’s recent operating momentum is very strong. But expectations are high and CEO Brian Sullivan (who was largely responsible for setting them ahead of last year’s acquisition by BSkyB) is leaving his post. A Bundesliga auction looms next year. In the current rights cycle, Sky’s outlay per Bundesliga game has been closely in-line with what it has been paying in the UK. Group EBIT forecasts are quite sensitive to changes in German assumptions. A 50 per cent step-up in Bundesliga costs from FY17/18 (vs. +40 per cent base case) combined with a slim 1 per cent pa reduction in pricing assumptions (taking effect from FY15/16) is still enough to reduce Group adj. EBIT by ~5 per cent in FY17/18.”

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