WHY IS SKY SO

PROFITABLE?

Table of Contents

Executive Summary

Industry Overview
Broadband market overview
Competitive Landscape

Company Considerations
Headline operational metrics
Financial Forecasts
Financial metrics
Share price performance
Acquisition history

Trade Idea

Appendix

Executive Summary

Sky Plc, formerly known as BSkyB is a telecommunications company that provides television,
broadband internet services and fixed line telephone services in the UK

Skys previous profitability has been due to its increasing variety of products to its customer base

As a broadband services provider, Sky Plc. faces increased competition from similarly established
companies, such as BT and Liberty Global, as well as new streaming platforms like Netflix. Its
future profitability rests on its ability to continue expanding its customer base, maintaining
current product offerings and diversifying product offerings. Sky Plc. has done this through:

Acquiring Sky Italia and Sky Deutschland to create a Sky Europe

Gearing up for the Premier League auction in 2015

Introducing new streaming services such as NOW TV.

On a discounted cash flow basis, the company is intrinsically valued at 889p. Current Sky Plc.
shares are trading on the London Stock Exchange at 916p per share

INDUSTRY OVERVIEW

Broadband Market Overview

Over the past few years the broadband market has shown potential for companies
in the telecommunications industry.
Sky Plc. remains a contender in the broadband market, but faces stiff competition
from the likes of BT and Virgin Media

Broadband Market Share

3.2%

3.5%

31.5%

18.5%
20.4%

22.8%
BT

Sky Plc.

Virgin Media

Talk Talk

Orange

Others

Growth of broadband subscriber market

Competitive Landscape
Sky faces stiff competition from both its content and consumer businesses, but
faces the most competition through its Sky Broadband, Sport and TV
businesses.
Sky Broadband

Sky Sport

Sky TV

Netflix

BT

BT

Tiscali

ITV

Liberty Global

Vodafone
BT
Telefonica
Liberty Global

ITV

COMPANY
CONSIDERATIONS

Key Company Considerations

Sky continues to report a strong financial performance

7.6bn in Revenue (2014 Annual report)
1.3bn in Operating profit (2014 Annual report)
60.0p earnings per share (2014 Annual report)

Numerous growth opportunities

Successfully transitioned to a multi-product consumer strategy
Introduction of NOW TV, Skys over-the-top streaming service
Launch of Sky AdSmart, Skys targeted advertising business

Sky has successfully secured exclusive TV content through a number of strategic

deals
Signed major new partnerships with HBO and ITV
Renewed its multi-year movie agreement with Paramount pictures
Signed 30 new sports rights agreements

Key Company Considerations

Sky will continue to face increased competition from modern streaming platforms
like Netflix as traditional TV business stalls
Skys response to this is NOW TV, a low-cost set-top box and internet service that does not require
a pay-tv subscription.

The realization of Sky Europe could offset the loss of UK subscribers

Created following the successful acquisitions of Sky Italia and Sky Deutschland
Provides a growth opportunity by selling more products to new customers (estimated at over 8
million subscribers)

Sky faces increased competition from BT to maintain its competitive edge in

sports
BT competes with Sky for prime rights such as the Premier League and Champions League football.

Headline Operational Metrics

Churn (3Yrs)
Churn measures the difference between
customers who reinstated their contracts and
customers who terminated their contracts
Customer subscriptions continue to increase
despite stiff competition in the broadband
market
Sky has also increased its products offering
each year, to maintains Skys value amongst its
competitors
In 2013, Sky added 547,000 new customers
and grew the products taken by 11% to 31.6
million

Product & Customer Growth

Financial Forecasts

The company is forecasted to grow its sales by

y-o-y between 2014-2018 but growth will slow
sharply, reflecting increased competition
Sales growth is expected to continue in light of
greater market penetration from recent
acquisitions
Skys Operating Profit and EBITDA forecasts
remain positive due to the companys
established business model
Sales & Growth (14-18)

EBITDA & Margin (14-18)

EBITDA
4.00
3.00
2.00
1.00
0.00

23.0%
22.0%
2.92
21.9%
2.53
2.42
21.0%
1.98
20.3%
20.0%
1.67
19.1%
19.0%
18.7%
18.6%
18.0%
17.0%
16.0%
2014E
2015E
2016E
2017E
2018E

EBIT & Margin (14-18)

EBIT

Growth (%)

20

50%
40%12.709
10.663

15
10

13.539

14.417

20%

19%
5
0

2014E

40%
30%

7.617

7%

5%

6%

10%
0%

2015E

2016E

2017E

Margin (%)

2.5

2.07
17%

2
Sales

Margin (%)

2018E

1.5

1.3

1.7

1.6
1.3 12%

13%

13%

20%

14% 15%
10%

5%

0.5
0

0%
2014E

2015E

2016E

2017E

2018E

Key Financial Metrics - Gearing

Skys falling Debt/Equity ratio
forecast highlights the companys
cash and equity based financing of
recent acquisitions.

Net Debt / EBITDA

0.80x
0.12x
2013A

2014E

Sky is able to take on the additional

debt burden to pursue further growth
of the business if need be

2015E
-0.64x

2016E

2017E

2018E

-1.31x
-1.86x
-2.42x

Debt / Equity

Net Debt / (Cash) - $M

6.41
2.48x

1.32x
1.22
2013A

2014E

2015E
-1.45

2016E
-0.65

2017E
-0.41

2018E
-0.33

2013A

2014E

0.88x

0.65x

0.51x

0.41x

2015E

2016E

2017E

2018E

Share Price Performance vs. Competitors

(Last 12 Months)

Acquisition History

Since 2011, Sky Plc. has acquired 5 key businesses with a total cumulative deal
value of 7.3 bn

Skys strategy has been to focus on businesses which either increase its market
share in existing businesses, or create opportunities in new markets

This has provided Sky Plc rapid cost savings and the addition of installed bases and
channels which has created significant cross-selling opportunities

Announced Date

Target

Rationale

Deal Value

Sky Plc. Acquisition History

January 2011

The Cloud

To increase its mobile content portfolio

April 2013

O2 and Be
Broadband

Leapfrog Virgin Media to become the

second in the UK broadband market
behind BT.

November 2014

Sky Italia and Sky

Deutschland

Create Sky Europe

50 m
200 m

7 bn

TRADE IDEA

Valuation Commentary

To evaluate the value of Sky Plcs shares, I have developed a 5-year discounted
cash flow forecast for FY14-18E, incorporating financial assumptions about the
future profitability of the Sky Plc.

Key assumptions used include:

- WACC: 8.7%
- Terminal growth rate: 3.0%
- Net Debt position: 1,392m
- No. of outstanding shares: 1,719m

Using DCF analysis, the shares are valued at 889p. Sky Plc. Shares are currently
trading on the London Stock Exchange at 916p per share.
- This implies a 1.03x market premium to fundamental DCF value

Discounted Cash Flow Analysis

APPENDIX

Income Statement

Balance Sheet

Cash flow Statement

Financial Assumptions

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