Sky: Challenges on all fronts
July 10, 2015
A ‘war of words’ has broken out between Sky and BT, with Sky calling for BT’s ‘Openreach’ service be separated from the rest of the telco. Meanwhile, BT raised the level of rhetoric by claiming that Sky’s position in the UK is now “so dominant” that some sports bodies “wouldn’t even talk to us” over sports rights. Regulator Ofcom will publish the results of its outline findings in an examination of the market at the end of July.
Indeed, later this month on July 29th, Sky will issue its latest quarterly (and year-end) numbers. Investment bank Jefferies, in a note to clients on July 10th, forecasts a positive set of numbers notwithstanding those challenges at home from the likes of BT, and in Italy and Germany.
Jefferies suggest that recent rumours regarding a take-over of Italy’s Mediaset Premium (MP) should be “played down”. Analyst Jerry Ellis says: “We think management will concede that the loss of Champions League rights to MP will be a headwind through 1H15/16. Our understanding is that the distribution deal with Telecom Italy (TI) is starting off slowly. Looking beyond the near-term, we expect Sky to express confidence that its Italian business is capable of delivering healthy top- and bottom-line growth. With consensus largely factoring this in already, the pressing task now is to lay out the building blocks for getting this done and to ensure that they do not involve unconvincing assumptions about cooperation with TI.”
The bank expects Sky Italia’s revenues to fall 1.3 per cent, although this is inevitable given that a year ago saw Sky benefit from the Winter Olympics and FIFA soccer. “Mediaset is reportedly targeting customer gains of 0.5m after it takes over this coverage. Sky can therefore anticipate some pick-up in churn and retention costs, although lack of Olympics/World Cup should allow programming costs to fall. We model FY14/15 EBIT of €67 million, in line with consensus,” says the bank’s note.
Sky’s German operation also creates something of a worry. Ellis says: “It strikes us that the consensus forecast range for Germany is quite wide. While the operating prospects continue to look encouraging, we believe that Sky may take the opportunity post-results to tighten the consensus range at an achievable level. Less than a year away from a Bundesliga rights auction, we shall be looking for initiatives to broaden Sky’s appeal to German consumers not primarily motivated by football.”
Jefferies expects Germany to hit a 10.3 per cent revenue growth for the quarter and to end up with an EBIT loss of €14 million (loss of €75 million a year ago).
As for the UK and Irish market the bank reminds investors that Sky UK’s annual revenue increase kicks in from June 1st so will help its Q4 revenues, and Sky itself is guiding that it sees the revenues “sticking” and not affecting Churn. However, the bank’s report also recognises that BT is toughening up its offering with better TV content, and new player TalkTalk is also beefing up its position in the market.
The bank says: “We model group adjusted EBIT of £1,569 million, implying pro forma growth of 12.8 per cent y/y (benefitting from UK price hikes and tight cost control in Italy). In the following year, we expect adjusted EBIT to drop back to £1,517 million as new English Premier League rights take effect.”