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Sky - 12% profit growth and yet more customers join

George Salmon | 28 July 2016 | A A A
Sky - 12% profit growth and yet more customers join

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Sky have this morning released results for the year to 30 June 2016. With operating profit up 12% and over 800,000 new customers added in the year, the shares were up over 6% this morning.

Highlights, with figures at constant currency rates:

Group revenue for the year increased to £12bn, a 7% increase on last year.

The UK remains the largest division, with revenues increasing by 7% to £8.4bn. Operating profit in the UK has risen 11% to £1.5bn. 445,000 new customers and 2.3m new products were added during the year. Sky continue to limit retention discounts, and customer churn rose slightly to 11.2%.

In Germany & Austria, revenue increased by 12%, allowing the division to make a positive contribution to operating profit for the first time. Total customer growth was 346,000, including 59,000 new customers in Q4. Sky's customer base grew in Italy by 17,000, the first increase in 5 years. Revenue grew by 2% but operating profits fell from £58m to £50m.

Looking forward, Sky confirm plans to launch their brand into the UK mobile market and will launch a VR app later this year. Revenue growth of 5-7% is targeted, and the focus on controlling costs is set to continue. The current synergy target from the integration of Sky Deutschland and Sky Italia of £200m by 2017 has been extended to £400m by 2020. Separately, Sky will carry out a cost reduction programme of 2-3% of sales, or over £300m in FY17, to help offset the step up in Premier League costs.

The full-year dividend is set to increase by 2% to 33.5p, the 12th consecutive year of dividend growth.

Our view:

The UK TV and broadband market is as competitive as it has ever been, but Sky are more than holding their own. Plans to launch a mobile offering later this year will surely add extra spice to the growing rivalry with BT.

With the UK representing an increasingly mature market, the big growth potential is internationally, and Sky are confident that they can roll-out expansion in Italy, Germany & Austria in the same way that they have in the UK. If Sky are successful though, the reward would be vast. At present, UK customers pay an average of £47 per month each, while those on the continent pay around 15% less.

If the European ventures start making headway, it would be one way for Sky to come to terms with the problem of the seemingly ever-increasing cost of broadcasting the football. At home, Sky need to find an extra c.£600m to cover the cost of the last deal, while in Germany the cost has shot up by 80%, to EUR876m a year.

For the time being, Sky are looking to negate the cost by leveraging its biggest strength at home- the fact that their reputation for cutting edge innovation and excellent content means that customers can't bear switching off, even when Sky firm up prices. Only 1 in 9 customers are leaving annually, and with plenty more coming in, the recurring revenue base continues to grow.

The step-up in Premier League rights costs will start to bite in the coming year (FY17) and price rises alone will not be enough to offset this. This is why the group is also embarking on an aggressive cost-cutting programme. Investors have been sceptical as to just how far Sky can push its cost saving initiatives, particularly when it is having to invest more in own-content to justify price increases and ward off the likes of Amazon and Netflix. Encouragingly, Sky increased its cost saving and synergy targets alongside its full year results, which provides a strong vote of confidence.

At present, the shares offer a prospective yield of around 3.8% and trade on a forward PE of 15x earnings, which is slightly below their long-run average.

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.