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1.
1. Company Information:
British Sky group Plc is an integrated play in the media and entertainment space with operations
in the whole of United Kingdom and Ireland. The firm came into existence in 1990 when Sky
Television and British Satellite Broadcasting merged into a single entity. Today the company has
slowly transformed itself into a leader in the space of television and satellite entertainment and
pay services providing its services to more than 10 million homes in Ireland and United
Kingdom.
The firm provides television and broadcasting services through its bouquet of channel namely
Sky Sports, DTH, Sky Player and Sky Mobile TV.
The company has had a pretty significant 2013.From being just an entertainment and broad
casting play the company has beautifully scaled its way as a second largest broadband service
provider only second to British Telecom. The recent strategic acquisition of O2s telephonic and
broadband services has provided enough room to diversify itself into the internet and broadband
market. Today British Sky group has 4.9 million subscribers in the telephony and broadband
services.
The financial KPIs also see a fresh impetus with ARPUs seeing a steady rise to 577 pounds. This
year the company has seen a rise of 547,000 new household customers and currently holds 40%
of the total share of household in UK.
Sports had continued to be its major earning generator. It has renewed its relationship with 6
major movie studios from Hollywood. The recent surveys showed the emergence of Sky Living
and Sky Atlantic as the top 5 pay TV channel. The emergence of its mobile telephony and
special download features through Sky Go has become an instant success. The features can be
used to access various value added services in mobiles as the company has aggressively tied up
and forged partnership with various telecom service providers. The users of value added services
are also seeing a rising trend and we expect the company to add a significant tally to its already
3.33 million existing customer base
3
Unique 3 tier business model: The Company has a unique three tier business model that is very
robust and has ability to safeguard the portfolio from all possible strains.
Revenue sources through its various paid entertainment services. The major sources of earning in
this segment come from fees from subscription and advertisements. The company has a portfolio
of some of the most popular channels which have high TRP ratings and are good source of
advertisement revenue generator for the company.
They are:
Sky 1: It is the most popular family entertainment channel in UK which airs some of the most
popular shows like Simpsons, Got to Dance and so on.
Sky Living caters to female audience with tailor made shows like soap operas and dramas like
Elementary and Hannibal.
Sky Movies is a movie channel which airs Hollywood classics and all newly released movies.
The channel has a tie up with HBO, through which airs many of the shows of HBO.
Sky Sports is the most watched and viewed channel for sports lovers across United Kingdom.
The channel is an official partner of British Premier League and English Cricket and Football
team. This ensures a very high viewership and advertisement revenues for the group.
Revenue sources Retail subscription, data services, value added services and mobile services as
well as broadband services.
2 Present Situations:
British Sky group Plc has been a stellar performer over the last few years and has been one of the
handful companies which had not been impacted much from the Subprime crisis of 2008.
2.1 Acquisition of O2:
The company has recently acquired a big chunk of O2s data services which have dented their
financial position to a considerable extent. But we are very bullish regarding this acquisition.
This enables the group to further diversify its portfolio from being just a provider of regular
entertainment channels to step into the next generation data, telephony services, and broadband
and entertainment business for mobiles, tables and apps.
This will enable the company to add to the already existing 4.9 million subscribers in it
telephony, data and broadband services. The acquisition has been an all cash deal of 200 million
pounds and will definitely add a 5% rise in revenue with effect from 2014. We view this very
strategic move for the company as it opens up a new dimension to the next generation services
that Sky promotes through its flagship Sky Go and Now TV.
2013 has also seen the group investing more into its connected boxes which facilitates further
enhancement to the various value added services it wants to provide to its client.
Recently the group had announced its intent to buy 500 million pound worth of equity which is
another positive for the company. This clearly sends a message that the company is looking to
increase its promoter holding stake and that means management is confident about the upcoming
business environment in the media, entertainment and data communication space. This buys back
of shares Is EPS accretive in the overall Earning per Share calculation. The share buyback is
expected to get completed somewhere in 2014.
The company has posted a robust financial performance for 2013. The financial KPIs have seen a
fair uptick.
The Average Revenue per Unit has seen a 3% rise in 2013 from the last year and we view this as
a strong show from the company.
As per our complex valuation metric we have a varied future projection growth for the period
2014 to 2007.
Revenue growth
1-Jan-11
1-Jan-09
1-Jan-07
1-Jan-05
1-Jan-03
1-Jan-01
1-Jan-99
1-Jan-97
1-Jan-95
200
150
100
50
0
-50
1-Jan-91
Axis Title
Revenue growth
y = -364.5ln(x) + 3861.7
On applying the complex logarithmic equation above, we come to a futuristic forecast for the
revenue for the company.
Year
30-Jun-14
10.81
30-Jun-15
7.52
30-Jun-16
4.24
30-Jun-17
0.94
We expect 2014 to be a bumper year for the company as the FIFA World Cup is expected to
garner nearly 15% growth in advertisement revenues for the group. And with most of its
acquisition and capital expenditure already done in 2013, we expect the company to reap good
benefit as a result of this.
Our EPS estimates are projected in the table below.
Operating
2013
2014
2015
2016
2017
1291.0
1430.6
1538.1
1603.4
1618.4
0.6
0.8
0.9
0.7
0.8
-454.0
-484.0
-515.9
-550.0
-586.3
14.4
14.5
13.3
12.2
13.1
income
EPS
Capital
expenditures
P/E
2011
2012
1351.0
1174.0
1410.0
353.0
327.0
282.0
300.6
320.5
341.6
364.1
Total Inventory
375.0
456.0
548.0
584.2
622.7
663.8
707.6
Prepaid expenses
239.0
294.0
309.0
329.4
351.1
374.3
399.0
11.0
24.0
20.0
21.3
22.7
24.2
25.8
2329.0
2275.0
2569.0
3317.4
896.0
948.0
1041.0
1344.2
Goodwill, net
944.0
956.0
999.0
1290.0
Intangibles, net
462.0
523.0
718.0
765.4
815.9
869.8
927.2
366.0
384.0
603.0
642.8
685.2
730.4
778.7
0.0
0.0
0.0
0.0
0.0
0.0
0.0
288.0
407.0
377.0
401.9
428.4
456.7
486.8
5354.0
5509.0
6345.0
8144.3
2013 2014E
LIABILITIES
2015E
2016E
2017E
1820.7
0.0
0.0
0.0
0.0
Accounts payable
503.0
729.0
823.0
877.3
935.2
996.9
1062.7
Accrued expenses
799.0
760.0
828.0
882.6
940.9 1003.0
1069.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
8.0
8.0
11.0
11.7
12.5
13.3
14.2
Notes payable/short-term
debt
Current portion long-term
debt/capital leases
602.0
601.0
655.0
1912.0
2098.0
2325.0
Total debt
Deferred income tax
Minority interest
793.4
845.8
2317.0
2992.0
2398.0
2909.0
3756.4
2333.0
2406.0
2920.0
3770.6
0.0
1.0
1.0
1.0
1.0
1.0
1.0
113.0
120.5
128.4
136.9
6886.2
--
-82.0
68.0
106.0
4319.0
4565.0
5333.0
0.0
EQUITY
Common stock
876.0
837.0
797.0
1437.0
1437.0
1437.0
-1185.0
-1286.0
-1086.0
(accumulated deficit)
Treasury stock - common
--
--
--
--
--
--
744.3
--
SHAREHOLDERS
Retained earnings
698.2
14.0
68.0
11.0
1035.0
944.0
5354.0
1753.0
797.0
797.0
797.0
1437.0
-1157.7
1234.1 1315.5
1315.5
11.0
11.0
1012.0
1258.0
5509.0
6345.0
7167.0
1674.0
1594.0
1699.2
--
0.0
11.0
797.0
0.0
11.0
0.0
0.0
0.0
2011
2012
2013
2014
2015
2016
2017
REVENUE AND
GROSS PROFIT
Total revenue
OPERATING
EXPENSES
Cost of revenue total
Selling, general and
admin. expenses, total
Depreciation/amortization
Unusual expense(income)
Other operating expenses,
total
-26.0
--
--
0.0
0.0
0.0
42.0 --
0.0
0.0
0.0
--
0.0
0.0
0.0
--
Operating income
Other, net
--
--
--
INCOME TAXES,
MINORITY INTEREST
AND EXTRA ITEMS
Net income before taxes
256.0
283.0
278.0
290.0
758.0
906.0
979.0
--
-52.0
-0.0 --
10
295.0
278.0
240.0
Net income
Inc.avail. to common
excl. extra. Items
Inc.avail. to common
incl. extra. Items
810.0
906.0
499.7
758.0
906.0
499.7
810.0
906.0
499.7
EPS
RECONCILIATION
Basic/primary weighted
average shares
EPS
0.5
0.6
0.8
0.9
0.7
0.8
0.2
0.3
0.3
0.3
0.3
0.3
0.3
405.0
422.0
475.0
475.0
475.0
475.0
475.0
129.0
130.0
131.0
131.0
131.0
131.0
131.0
179.0
179.0
176.0
176.0
176.0
176.0
176.0
26.0
39.0
-1.0
0.0
0.0
0.0
0.0
739.2
770.8
781.9
782.3
782.3
782.3
782.3
COMMON STOCK
DIVIDENDS
DPS - common stock
primary issue
Gross dividend - common
stock
Interest expense,
supplemental
SUPPLEMENTAL
INCOME
Depreciation,
supplemental
Total special items
NORMALIZED
INCOME
Normalized income
before taxes
Effect of special items on
income taxes
6.6
9.3
-0.2
11
0.0
0.0
0.0
0.0
263.0
292.0
278.0
777.0
936.0
777.0
936.0
0.4
0.5
0.6
2011
2012
2013 2014E
1014.0
1189.0
Depreciation/depletion
173.0
179.0
176.0
187.6
200.0
213.2
227.3
Non-Cash items
197.0
120.0
114.0
121.5
129.5
138.1
147.2
219.0
254.0
300.0
319.8
340.9
363.4
387.4
124.0
125.0
128.0
136.4
145.5
155.1
165.3
-117.0
-153.0
-143.0
-152.4
-162.5
-173.2
-184.7
1426.0
1500.0
2073.8
-423.0
-457.0
-454.0
-484.0
-515.9
-550.0
-586.3
-195.0
-267.0
-48.0
48.0
51.2
54.5
58.1
-618.0
-724.0
-502.0
-436.0
-464.7
-495.4
-528.1
-124.0
-125.0
-128.0
-128.0
-128.0
-128.0
-128.0
-353.0
-410.0
-441.0
-470.1
-501.1
-534.2
-569.5
-58.0
-697.0
-681.0
-681.0
-681.0
-681.0
-681.0
290.0
0.7
295.0
278.0
240.0
0.8
0.8
0.9
2015
2016
2017
1623.2
OPERATIONS
Net income
Issuance (retirement) of
12
stock, net
Issuance (retirement) of
-1.0
-1.0
497.0
497.0
497.0
497.0
497.0
-536.0 -1233.0
-753.0
-782.1
-813.1
-846.2
-881.5
547.1
debt, net
Total cash from financing
NET CHANGE IN CASH
Foreign exchange effects
Net change in cash
--
--
--
272.0
-457.0
351.0
493.9
603.8
664.3
649.0
921.0
464.0
2459.9
921.0
464.0
3124.1
173.0
179.0
176.0
187.6
200.0
213.2
227.3
124.0
125.0
128.0
136.4
145.5
155.1
165.3
219.0
254.0
300.0
319.8
340.9
363.4
387.4
Net cash-begin
balance/reserved for future
use
Net cash-end
balance/reserved for future
use
SUPPLEMENTAL
INCOME
Depreciation,
supplemental
Cash interest paid,
supplemental
Cash taxes paid,
supplemental
As per the latest free cash flow model we have the following projected cash flow per share:
2013
EBIT
Depreciation
2014
2015
2016
2017
187.62
13
200.00
213.20
227.27
Cap Ex
-454.00
-483.96
-515.91
-549.96
-586.25
Current Asset
Current Liability
WC
252.00
678.29
604.29
475.88
284.49
FCFE
373.70
26.75
156.50
309.71
489.43
Equity base
0.23
0.02
0.10
0.19
0.30
2013
2014
2015
2016
2017
EBIDTA
Sales
BV/EBITA
0.78
0.73
0.72
0.74
0.78
BV/SALES
0.14
0.13
0.13
0.13
0.14
14
From all the financials above we see the company has a few things going for it:
A) Diversification of business into data services, broadband and telephony
C) The company has a steady operating model and its core business area is fairly secured in
terms of consistent realizations.
D) 2014 is going to be a bumper year for Sky Sports as lot of big time sporting activities like
World Cup are lined up. This will definitely lead to a 15% upside in advertisement
revenue which will translate into a 3% uptick in revenue.
So if we extend the idea forward we can say that the EPS estimate of 80 for 2014 will jump to
104 in 2014. (We have not added this into our estimated projection model).
Currently the stock trades at 940 Pounds which is nearly 12 time trailing FY 14 earnings
estimates and 10 times FY 15 estimates.
So in terms of valuation the stock is neither cheap nor too expensive.
Historically the stock trades at 13 times, 1 year forward earning. So going by that consensus the
stock has an upside potential of 1170.
15
Therefore we view the upside target of the stock at 1170 pounds which is 17% from current
level. However the downside too is limited and we expect the stock to find buying interest
around 900 odd levels.
Technically the stock looks to have solid support at 900 odd levels. An upside resistance stands
at 1000 levels. So price action tells us that a correction in the stock to 900 levels is a good time to
buy.
16
3.3 Conclusion:
We are overweight on the stock with an upside target of 1170 and downside support at 900.
As per dividend history the stock provides a yearly dividend of 3%. So adding that into
perspective an investor can buy it at current level for an overall return of 20%.
Summary:
Rating: Overweight
Recommendation: Buy
Target: 1170
Buy: At current levels
Downside: Limited to 900
17
4 Appendix
Financials.xlsx
While preparing the balance sheet for future years we have made few assumptions:
We have considered the fact that most of the capital expansion for the company is done in 2013
and we expect the company to consolidate its position going forward.
Applying our future projection model which is in sheet 2 we have obtained the yearly growth
rate for the company by applying the geometric mean method. We are taking the yearly growth
rate at 6.6%
Applying linear growth model we see the projections coming out on the higher side so we reject
it and take a standard growth of 6.6%.
The growth model applied for income statement goes like this: We have taken the growth for
each year based on a logarithmic equation from our calculation sheet.
We have taken the growth for 2014, 2015, 2016 and 2017 as 10.81%, 7.52%, 4.24%, and 0.94%
18
5. References:
Clemens, E. (1951). Price Discrimination and the Multi-product Firm, Review of Economic
Studies, Vol. XIX: pp 1- 11.
Coase, R. (1960). The Problem of Social Cost, Journal of Law and Economics, Vol. 3: pp 1-44
Danzon, P. Towse, A. (2003) Differential Pricing for Stocks: Reconciling Access, R&D and
Patents, International Journal Finance and Economics, Volume 3(3), Pages 183-202
Finn, M., Elliot-White, M. and Walton, M. (2000) Tourism and Leisure Research Methods: Data
collection, analysis and interpretation. Harlow: Pearson Education.Chapter 1.
Gill, J. and Johnson, P. (1991) Research Methods for Managers. London: Paul
Chapman.Chapters 1 and 3.
Harrel, G.D and Frazier G.L. (1999). Marketing: Connecting with customers. Upper Saddle
River.
Investor
Information
available
at:
http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=BSY:LSE
Investor
Information
available
http://quotes.morningstar.com/stock/s?t=BSYBY®ion=usa&culture=en&ownerCountry=USA
19
at:
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