Thursday, 30 January 2014

BSkyB - content and cost control

The title of my last BSkyB piece was 'Too much worry' (link here) and whilst the share has not raced away in the interim I am pleased that I added to my position in the 800-820p range:

I talked about a c. 950p target back then, so what's the progress to that?
Well the key reason the shares are up today is nothing to do with the headline numbers which at the earnings level (ebitda, operating profit, EPS) looked lacklustre... is all to do with the underlying customer monetisation as shown below.  This is why the dividend was raised for a tenth successive year. 

Earnings were hit by the continued lumpy content push.  This had been well-flagged by management and should not have been a particular surprise to anyone.  What impressed me though was the impact of this on-going content push: paid-for products up, ARPU up and triple play (pay-tv, phone, broadband combination) numbers up.  Only a slight tick-up in the churn rate could be perceived as a negative.

I thought these excerpts from the corporate statement by the company nicely captured the progress being made:

'In the last 12 months, we have added 3.8 million paid-for subscription products, the fastest rate of annual growth in three years.

We added a record 1 million connected Sky+HD boxes in Q2 – almost 11,000 a day – to take our base of connected homes to 4.4 million.

Share of viewing to Sky Sports hit its highest level for six years in the first half, for the first time out-rating BBC2, Five and Channel 4 in Sky Homes.

further reductions in the number of service visits, now at their lowest level in ten years, and a halving in the number of install revisits'

The key is the content growth and cost control.  I continue to believe that the BT Sport launch will ultimately have a fairly negligible impact, especially as BSkyB continues to beef up its non-sport offering (assisted by the recent ITV and HBO content deals).  As noted in the third point above, BSkyB continues to do well in sport too.

Yes, content cost is rising, but with net debt of £1.4bn less than x1 ebitda and free cash flow likely to be around £900m for the year (around a 6.5% free cash flow yield, of which just over half is paid out, plus most of the £500m buyback is still waiting to be enacted), the company retains strong balance sheet flexibility. 

In short, I am retaining my 950p equivalent to around a prospective x12 EV/ebit.  And that's before any Murdoch/Vodafone takeout/jv rumours that are currently circulating. 

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