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Sky shows fortitude

Strong demand for Sky's connected boxes and content fuelled growth across the board
July 29, 2015

These robust results from Sky (SKY) should reassure investors worried about mounting competition from BT (BT.A). Strong customer growth and lower customer attrition at the pay-TV, broadband and telephony titan fuelled a 5 per cent rise in underlying sales. Coupled with stringent cost control, that drove adjusted operating profit up 18 per cent to £1.4bn.

IC TIP: Hold at 1116p

Sky signed up 973,000 new customers, which took its total user base to over 21m and prompted a 9 per cent rise in the number of paid-for subscription products it sold to 53.8m. Churn, a measure of how many customers cancelled subscriptions, fell to under 10 per cent in all three of Sky's territories: the UK and Ireland, Germany and Austria, and Italy.

Brisk demand for TV and broadband services helped Sky attract over half a million customers in the UK and Ireland - the highest annual growth in over a decade. That drove regional revenue up 6 per cent to £7.8bn. Meanwhile, continued deployment of internet-connected set-top boxes boosted sales by 77 per cent at Sky Store, the group's movie purchase and rental service.

Record customer additions pushed sales up 9 per cent in Germany, narrowing the region's operating loss by more than four-fifths to £11m. Sky also stabilised the Italy business after three consecutive years of losing customers, and cost-cutting prompted a 56 per cent jump in cash profits to £61m.

Sky's success stems partly from its 'triple play' strategy of selling TV, broadband and fixed-line telephony. Management expects the launch of a mobile service in 2016 - making the triple play a 'quad play' - to stoke further growth. But investment in original programming and exclusive content, and the company's rollout of new products and services, have also been key.

On the downside, Sky's takeover of Sky Deutschland and Sky Italia in November meant net debt ballooned more than fourfold to over £5bn. However, management expects 'Sky Europe' to generate £200m in annual synergies by June 2017. Another problem is that average revenue per user has been essentially flat for the past two years, suggesting Sky has relied on promotions and discounting to attract and retain customers, according to Jefferies.

Broker Numis expects pre-tax profit of £1.34bn in the year to June 2016, giving EPS of 61.1p (FY 2015: £1.20bn and 56p).

SKY (SKY)
ORD PRICE:1,116pMARKET VALUE:£19.2bn
TOUCH:1,116-1,118p12-MONTH HIGH:1,180pLOW: 839p
DIVIDEND YIELD:2.9%PE RATIO:14
NET ASSET VALUE:184p*NET DEBT:157%

Year to 30 JunTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20116.601.0143.523.3
20126.791.1952.625.4
20137.241.2660.730.0
20147.451.0352.532.0
20159.991.5279.132.8
% change+34+48+51+3

Ex-div: 22 Oct

Payment: 20 Nov

*Includes intangible assets of £8.24bn, or 480p a share