In the summer it seemed that pay-TV provider British Sky Broadcasting (BSY), or BSkyB, was facing a serious competitive threat. That reflected the launch by BT Group (BT.A) in August of a new sports TV channel, showing free Premier League football to its existing broadband customers. But after BSkyB revealed impressive first-quarter growth this month, it may be that BT’s offering isn't the threat that had been feared. Moreover, BSkyB's - still depressed by what we could label the ‘Murdoch’ discount - are undemandingly rated and generate a reasonable income.
- Impressive first-quarter performance
- Long-term growth catalysts
- Brushing aside BT threat
- Returning capital to shareholders
- The Murdoch factor
- Short-term hit from one-off costs
Strong demand meant the BSkyB sold an extra 800,000 products in the first quarter and across its range of TV, broadband and telephony products now sell over 32m of them to almost 15m customers. The home communications business performed especially well, with the addition of 111,000 net broadband customers in the period - 9 per cent more than in last year’s first quarter. BSkyB now has over 5m broadband customers and is catching up with BT’s 6.8m total. Total customer numbers rose 11 per cent in the quarter and, more important, average revenue per user rose by £17 on the year to £559.
True, the costs of Premier League football and investment spending meant that adjusted operating profit fell 8 per cent in the quarter to £285m. Those factors - along with integration costs from March’s acquisition of Telefónica UK's broadband unit - help explain why broker Numis Securities expects adjusted earnings for the year to end-June 2014 to fall around 2 per cent. But those costs, which had been well flagged at the full-year stage, are no reflection on the group’s longer-term growth profile. The broker expects adjusted earnings to jump 17 per cent in the year to end-June 2015, and by 14 per cent in 2015-16.
BRITISH SKY BROADCASTING (BSY) | ||||
|---|---|---|---|---|
| ORD PRICE: | 933p | MARKET VALUE: | £14.9bn | |
| TOUCH: | 932-933p | 12-MONTH HIGH: | 951p | LOW: 704p |
| FWD DIVIDEND YIELD: | 3.6% | FWD PE RATIO: | 14 | |
| NET ASSET VALUE: | 64p | NET DEBT: | 117% | |
| Year to 30 Jun | Turnover (£bn) | Adj. pre-tax profit (£bn) | Adj. earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 6.60 | 1.01 | 46.5 | 23.3 |
| 2012 | 6.79 | 1.15 | 50.4 | 25.4 |
| 2013 | 7.24 | 1.26 | 59.1 | 30.0 |
| 2014* | 7.66 | 1.19 | 57.7 | 31.0 |
| 2015* | 8.10 | 1.35 | 67.4 | 34.0 |
| % change | +6 | +13 | +17 | +10 |
*Numis Securities estimates Normal market size: 3,000 Matched bargain trading Beta: 0.45 | ||||
Those longer-term prospects reflect the reviving health of the UK’s housing market. The ITEM Club, an economic forecasting consultancy, for instance, anticipates "well over a million" housing transactions this year, a 12 per cent increase. "We believe a key time for households to consider their TV and communications providers is when they move house and accordingly an increase in housing transactions should be a positive for Sky," reckons analyst Paul Richards of Numis. Related to this is an improving economic backdrop which, when added to more housing transactions, leaves Mr Richards anticipating "scope for an acceleration in customer acquisition" by BSkyB.
BSkyB’s shares offer decent income characteristics, too. There is a prospective yield of well over 3.3 per cent based on Numis’s forecast payout for 2013-14, which is better than the media sector’s average yield of around 2.6 per cent. In addition, management has been returning capital through share buy-backs. Back in 2011-12 BSkyB bought in £750m-worth of its shares and a further £500m in 2012-13. Now management is seeking approval at next month’s annual meeting to buy back another £500m-worth. True, this is adding to BSkyB’s debt, though that’s hardly an issue - interest paid was covered almost 15 times by operating cash flow in 2012-13.
