BSkyB for growth and income

Built into BSkyB shares' relatively low rating is the perceived threat of competition from sports-TV upstart BT, particularly after it won the live broadcasting rights for the Champions League in November last year. Indeed, this challenge encouraged us to move BSkyB's shares from a 'buy' to 'hold' at the start of the year. But progress at the group has been impressive since then and we feel a recent big European deal has substantially boosted the potential upside for investors, which makes the value on offer too stark to ignore.

BSkyB boasts a stellar track record, having more than doubled its paid-for subscription product base in the past five years and increased its sales by 43 per cent. That looks set to continue, with analysts at Numis forecasting sales growth of 30 per cent this year and a quarter in 2015, and double-digit pre-tax profit growth in 2015 and 2016.

That sharp rise in sales and earnings reflects BSkyB's recently approved purchase of Sky Italia and Sky Deutschland from 21st Century Fox. The deal will make it the leading pay-TV provider in three of Europe's four largest markets and widen its customer base from 11.5m to 20m. It also provides plenty of room for expansion - two-thirds of BSkyB's 97m addressable households are yet to take pay-TV - and should diversify the group's revenue streams, which could be invaluable during an uneven European recovery. And the larger group will have greater clout in negotiations with content providers and other suppliers, allowing it to agree greater discounts and drive down costs. Finally, BSkyB expects to net £200m in annual synergies by 2017, which analysts view as a conservative estimate.

BSkyB has pursued a strategy of connecting customers' TV boxes to the internet and pushing 'triple play' packages of broadband, pay-TV and telephony services. Over half of its TV customers are now connected, which tripled usage of its on-demand service and doubled sales at its online Sky Store last year. BSkyB also increased its triple-play subscribers from 35 to 37 per cent of its customer base, even as it added 342,000 new customers, the largest increase in three years. Those gains helped it increase average revenue per user - a key measure for media companies - by £7 to £576.

Recent programming deals have been impressive and costs are being tightly controlled. For example, the media conglomerate has inked an exclusive deal to carry HBO programmes such as Game of Thrones in Britain and Ireland for the next six years. And it has partnered with ITV to give Sky customers access to ITV programming. Meanwhile, last year Sky Sports achieved its highest share of viewing audiences in seven years as it showed 116 live fixtures including 49 of the 50 most-watched matches over the past 12 months.

Another of BSkyB's strengths is its cost discipline. Its programming costs rose only 1 per cent last year after stripping out the one-off increase in Premier League content costs and its discontinued carriage of ESPN sports programming. And the group should benefit from the rejuvenated UK housing market, as consumers are most likely to change their TV and telecoms packages when they move into a new home.

Perhaps most importantly, from an investment perspective at least, BSkyB's shares look cheap. They trade at 13.7 times consensus next 12-month forecast earnings, which is a 15 per cent discount to the 10-year historical average rating of 15.7 times, in line with BT's rating of 13.2 times and below ITV on 15.2 times. They also offer an enticing yield of almost 4 per cent. And BSkyB has a rich history of returning value to shareholders. For example, it spent £750m on dividends and share buy-backs last year.