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Sky - "Excellent first half"

Charlie Huggins | 29 January 2016 | A A A
Sky -

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Sky shares rose by 3% in early morning trading on the back of its second quarter and first half results. The group added 337,000 new customers in Q2, and 1.1 million new paid-for products, with growth across all markets. First half revenues grew 5% to £5,718m, including subscription revenue growth of 4%. Operating profit rose 12% to £747m, while earnings per share grew by 10%. The Board has declared a 2% increase in the interim dividend to 12.6 pence.

Sky also announced today that James Murdoch is to succeed Nicholas Ferguson as Chairman. Mr Murdoch has been a Director of Sky since February 2003 and previously served as Chief Executive and Chairman, before stepping down in the wake of the phone hacking scandal.

Geographic highlights (constant currency):

UK and Ireland: Revenue grew 6% to £4,072m, and operating profit was up 16% to £756m. Retail customers grew by 205,000 in Q2, the strongest performance in 10 years, with 778,000 new paid-for products added. Churn was down 30 basis points to 10.2%. Broadband additions were up 27% in Q2 to 144,000, while NOW TV sports transactions rose by 30%. New product launches planned for later this year include a brand new NOW TV box, and a premium TV service - Sky Q.

Germany and Austria: 120,000 customers added in Q2. Revenue increased 10% to £693m, with an operating loss of £34m.

Italy: 12,000 new customers added in Q2. Revenue decreased 3% to £953m, with an operating profit of £25m (2015: £31m).

Jeremy Darroch, CEO, commented:

"We're excited about 2016 and we start the year with good momentum. With an outstanding set of new initiatives and products for our customers, we are well positioned to deliver further strong growth and returns for shareholders."

Our view

The UK TV and broadband market is as competitive as it has ever been, but Sky are more than holding their own. All key metrics in the UK and Ireland are heading in the right direction. The group grew their retail customer base by 1.7% in Q2, the strongest growth for ten years. Broadband additions are up strongly and churn, at c. 10%, is at its lowest level for four years. This means a typical Sky customer stays with the group for 10 years on average, providing a recurring revenue stream for the length of that time.

The UK economy is recovering and Sky's customers are starting to find they have a little bit more to spend. Growth initiatives such as NOW TV, their pay-as-you go service for occasional viewers, are attracting a new type of customer. Good progress is being made in developing in-house content. A new premium TV service - Sky Q - will launch on 9 February and a consumer mobile launch is being prepared for the second half of 2016, to keep the momentum going.

Profit progression over the next few years could be lumpy, as Sky seeks to absorb £630m per annum of additional Premier League rights costs. Even so, by June 2018 analysts are forecasting earnings per share (EPS) of around 70p, a 26% increase on FY15. This puts the group on a prospective P/E of 15x for FY18.

Sky has built a very strong brand in the UK. It is the clear market leader in Pay TV but it faces the challenge of margin pressure, as competitors like BT bid against it for key content rights. If it can raise the performance of Sky Deutschland and Sky Italia, the impact of rising sports content costs might not be felt so badly. A larger Sky could potentially be better placed to bid for new rights too.

The low level of churn is a great strength; most of last year's revenues will still be there next year and the year after, because customers can't bear the idea of switching off. There aren't that many companies in the market with a revenue base as secure as Sky's. It now has around three years to try and improve the acquired businesses, before it has to go into battle for another set of Premiership rights.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.