Judging by the activity in the UK television (£7.4bn), internet (£4.7bn) and fixed-line telecoms (£8.7bn) markets, this broadcaster is set to fly high. Rather than just keeping pace with the changes taking place, the company’s management is helping to shape the industry’s future. The sector is forecast to grow from £20.8bn in 2005 to £25bn by 2010.
Tip of the week: BSkyB (BSY), tipped as a BUY by The Daily Telegraph
In the past year alone, BSkyB has launched Europe’s first national high-definition (HD) broadcast service, entered the home broadband and telephone markets via its £205m acquisition of Easynet, struck a forward-looking advertising deal with Google, bought online sports group 365 Media for £96m, and thwarted NTL’s bid for ITV, snapping up 17.9% of the shares for £940m. All are important, but HD – which delivers pictures four times as vivid as normal broadcasts – is perhaps the most significant. BSkyB leads the pack and consumer take-up is soaring.
BSkyB is now a powerhouse in the triple-play market – those firms offering bundled TV, internet and telephony services – as a result of recent deals. Last quarter, BSkyB also saw sales of £1.1bn (up 11%) and subscriber growth of 5% to 8.25 million – that’s 31% of all UK homes. The group aims for ten million subscribers by 2010, driven by UK pay-TV penetration rising from 45% currently to 75%.
Furthermore, more than 20% of customers now take at least one additional service, such as Sky Multiroom or Sky+. Last week, BSkyB reported that the total number of Sky+ boxes installed in homes had grown by more than 50% in the year and had broken through the two million barrier. Not wanting to be left behind, Sky HD subscribers more than doubled during the quarter to 96,000 – the fastest-ever customer take-up of an additional BSkyB product, and three times the sales levels achieved by Sky+ in its first year. These lucrative bolt-on services, together with broadband, are important – they not only allow BSkyB to charge a premium to its standard package, but also help lock-in customers and cut contract cancellations.
As for the financials, the City expects turnover of £4.5bn this year and £4.9bn next, generating corresponding earnings per share of 27.4p and 29.7p. So at 555p, the shares trade on forward p/e multiples of 19.9 and 18.4 respectively. This may seem costly, but not compared to the massive £1bn (or 52p per share) of operating cash flow that the business produced last year alone. And with gross margins of more than 60%, any future increase in turnover should largely fall to the bottom line, further boosting profits and cash flow.
So what do we need to watch out for? Competition from the likes of BT Vision, NTL/Virgin and even Freeview is hotting up, while the cost of buying exclusive content is also rising. BSkyB paid a hefty £1.3bn dowry for Premiership football rights for the next three seasons. But BSkyB has a good track record, strong cash flow and a near impregnable position in the UK pay-TV market, creating huge economies of scale that will be hard to replicate. In fact, if Rupert Murdoch (aged 75) ever decided to sell News Corp’s 37% stake in BSkyB, then how much could it be worth? Given BSkyB’s attractive recurring revenues and infrastructure backing, I wouldn’t be surprised if the business was purchased at a multiple of ten to 15 times earnings before interest, tax, depreciation and amortisation (EBITDA – see p.36), giving a share price 520p to 800p.
Recommendation: LONG-TERM BUY at 555p (interim results out 31 January)