Increasing broadband penetration in New Zealand and emerging distribution channels capable of bypassing traditional satellite technology are the biggest structural risks facing Sky Network Television.
Australian research firm Morningstar has resumed coverage of SkyTV with a warning emerging competition is likely to gradually affect SkyTV's high-margin, high-free cash flow business model.
Analyst Daniel Mueller said competition for content from players such as telecommunications companies Netflix, Apple, Google, Quickflix, Ezyflix, HBO and ESPN was likely to put pressure on programming costs. Marketing costs might ramp up in response.
The company's capital intensity might also increase as increasingly technology-savvy consumers shortened the set-top box upgrade cycle from the current seven to eight-year timeframe.
‘‘SkyTV currently generates about $120million, or about 13%, or its revenue base from renting set-top boxes to customers at $15 a month. This is a recurring stream unheard of anywhere else in the pay television world and one likely to disappear in the longer term, as competition increases and consumers resist.''
None of the structural threats were likely to affect SkyTV in the next two to three years, especially given the portfolio of content rights under contract, he said.
However, the company's narrow economic moat (competitive advantage) was likely to be whittled down gradually over time.
Emerging distributor channels had the potential for content owners to directly reach consumers, instead of being hostage to SkyTV as the aggregator and distributor, Mr Mueller said.
Some consumers were also becoming wary of paying for traditional pay television bundled channels and might increasingly gravitate towards a-la-carte options through over-the-top and broadband mobile platforms.
It was not all bad for the company, which was in solid financial health.
At the end of June 2015, net debt/ebitda stood at just 0.9 times.
‘‘These are very comfortable metrics and are further augmented by strong free cash flow generation of about $150million per year. Consequently, the company is well positioned in the near and medium term to retain its stranglehold on programming, invest in technology and set-top box upgrades while still maintaining a relatively high dividend payout ratio of about 70%.''
SkyTV faced foreign currency risk if the New Zealand dollar depreciated against the US dollar and, to a lesser extent, the Australian dollar.
Mr Mueller urged investors to exercise caution in terms of the multiples they were willing to pay for the current solid earnings and cash-flow streams.
Bull says
Sky Network Television is a monopoly provider in the New Zealand pay television market with a substantial subscriber base that is difficult to overcome in the medium term.
The company at present has a stranglehold on all the key content with consumer appeal, especially in the sports genre and on an exclusive basis.
It enjoys a strong financial position, augmented by solid free-cash generation, allowing management to maintain high dividends while reinvesting in content, new services and technology.
Bear says
Sky Network Television's core pay television business has reached maturity, with household penetration of its services stuck at just below the 50% mark during the past five years.
The company's core content aggregation, bundled-channel distribution and recurring subscription revenue business model is likely to come under threat longer term as internet-facilitated over-the-top distribution technology spawns new competition.
Emerging competition is likely to impact on SkyTV's high-margin, high-free cash flow business model. Programming and marketing costs are likely to increase, while capital intensity may also step up as increasingly technology-savvy consumers shorten the set-top box upgrade cycle.
