Investment bank Morgan Stanley has trimmed back its forecasts for BSkyB. While the bank remains content that BSkyB is “structurally sound” it has, nevertheless, taken the view that it needed to look closely at its overall business, and comes to the conclusion that it is time to reduce Sky’s numbers.
Morgan Stanley’s forecasts now slot into what were the bank’s bottom end of its previous forecasts. The bank also says that current talk of BSkyB making a major acquisition makes the market nervous. Worse, perhaps, is its prediction that Sky might not hit its 10m DTH subs forecast for 2010.

First, the upbeat topics: Morgan Stanley stresses that 80% of Sky’s income comes in the shape of subscriptions which continue to grow, “adding around 0.4m DTH customers a year to its base of just over 8m, around 5% pa. ARPU is rising (+4% in 2007/8), as BSkyB consistently raises prices but also offers a broader range of services. With the advent of ‘free’ broadband, however, BSkyB’s service is increasingly viewed by its customers as a value-based proposition. Churn is circa 10.5%, strong for a mass consumer product and BSkyB’s anti-churn measures (the weeding out of ‘phantom’ subscribers in 2006/7, the discouragement of ‘early’ churners through installation fee charges) together with the strong credit scores of its customer base suggest no shocks from churn in this part of the cycle.”

“Survey evidence suggests,” says the bank, “[that] BSkyB customers regard the service as essential rather than discretionary, while there is little historical evidence of correlation between UK economic slowdown and pay TV market growth. A longer time series in the US similarly suggests little correlation between US GDP and either pay TV subscriber or ARPU growth.”

The bank continues, saying: “It has the leading position in pay-TV services in the UK built on a reputation for quality content and service. Its subscriber growth has continued despite the development of Freeview and the revival of cable. It has repositioned itself as a triple play operator albeit, with just 9% of its base taking the triple play, there is substantial room for further upsell. BSkyB needs to be wary of new content consumption patterns (iPlayer and Kangaroo) but it has covered this by consistently capturing exclusive key content (the Premier League) and by developing its own online services such as SkyAnywhere.”

“In broadband, Sky is the UK’s fastest growing player. There is a medium-term risk of required mid-term incremental investment in faster broadband (fibre to the cabinet) but our valuation encompasses this by depressing terminal year cash flow by £335m to encompass a regular ‘technology reinvestment’ effect.”

The bank’s report then examines the potential risks for Sky. “On the negative side: (i) an adverse outcome to the pay TV market review [currently underway]. A further consultation document is due in 2008 and a conclusion is unlikely until 2009. The biggest risk is that BSkyB may suffer some level of unbundling but we suspect BSkyB will get through the review unscathed.

“(ii) Premier League rights renegotiation – always uncomfortable for BSkyB and due in about a year’s time. The economic downturn may tell against the Premier League. Our forecasts already incorporate a 17% rise in Premier League costs from 2010/11.

“(iii) Perception of required reinvestment in broadband – but we think fundamental changes to the local loop infrastructure are at least five years away.

“(iv) Acquisition risk. The market is likely to be nervous in the current environment of suggestions that BSkyB would be willing to lever up the balance sheet to make acquisitions in European pay TV (The FT reports (July 4, 2008) that BSkyB may have an interest in the auction of Spain’s Digital Plus; BSkyB has not commented.)”

There are other tangible risks covered in the bank’s report, not least the risk of an advertising downturn (Morgan Stanley trims a modest £2m from Sky’s ad-income for the current year to June 30 2008, and a 5% reduction for the next FY. There’s also a risk that churn will rise in parallel with the current economic squeeze.

The bank says they have edged up their forecasts for gross additions in both 2008/9 and 2009/10 to accommodate our forecasts for higher churn “(we recently raised 2008/9 from 10.2% to 10.5% and 2009/10 from 10.1% to 10.4%). We now assume that BSkyB responds to higher churn (itself caused by the negative state of the UK economy) by increased marketing efforts to attract more gross subscribers in order to keep its net additions at around the 400,000 per annum mark. Our forecasts now assume that BSkyB adds 398,000 new DTH customers in 2008/9, 386,000 in 2009/10 and 357,000 in 2010/11. This implies BSkyB will fall slightly short of its target of 10m DTH subscribers by the end of 2010.”

__________________
Press if you find post usefull.
Use "SEARCH" Before Posting, Post In Correct Sections, Respect Other Members.
AND ALWAYS REMEMBER... FOLLOW !!