Sky TV is seen as being "back from the brink" and indeed on a bull run following its increased profit guidance yesterday.
Forsyth Barr senior equity analyst Aaron Ibbotson has upgraded the pay-TV broadcaster from neutral to outperform.
He has also increased his 12-month target price from $1.80 (adjusted forSky's 10:1 share consolidation in mid-September) to $3.
Jarden's Arie Dekker and Luan Nguyen also bumped up their Sky ratings overnight, upgrading the stock from neutral to overweight and increased the target price from $1.80 to $2.42.
Sky's update had a heavy emphasis on cost-savings, which are now projected to be $40m-$45m above previous projections. Some $9m is one-offs, including negotiated reductions in sports rights, with the balance recurring.
Ibbotson said the savings were meaningful. "To put this into context; this is over 80 per cent of our prior FY23 pre-tax profit estimates," he told clients in a note titled "Back from the brink".
"But we consider the colour around revenues as well as cash generation to be at least as important."
The Forbarr analyst noted Sky is still on track for its first subscriber revenue growth in five years as streaming gains outstrip the decline of its traditional business for the first time.
Sky nudged up its revenue guidance yesterday from a $715m-$745m band to $725m-$745m. The pay-TV provider first flagged its revenue increase at its full-year report in August.
Ibbotson also highlighted that Sky's update revealed it is now in advanced negotiations for the sale of its sprawling campus in light-industrial Mt Wellington.
Dekker and Nguyen estimate Sky will get $50m to $60m for the 26,500sq m property, which has a mix of office buildings and studios.
Sky plans to lease back one studio on the property, but many staff will move to the CBD, and some will work from home.
Combined with cost-savings, the Mt Wellington sale should mean Sky finishes the year with a net cash position that equates to more than 30 per cent of its market cap ($360m at yesterday) close.
Dekker and Nguyen said that while risks remained from digital competitors, Sky now had several years' worth of "breathing room" thanks to its cash generation and clarity on factors like programming costs.
Sky said yesterday that it had entered a period of relative calm on the rights negotiation front, having recently concluded a round of multi-year deals with various entertainment content providers as it wrapped up its new HBO deal, while the NRL contract was the final tussle in a series of top-tier sports codes that have been up for grabs over the past 24 months.
Dekker said he could now forecast with confidence that Sky would have $84m in net cash by the end of the financial year - not including the estimated $50m to $60m from the Mt Wellington sale.
Both analysts praised the new era of relative predictability following a period marked by sports rights spats with Spark, and the pandemic upending the sports calendar.
Ibbotson also noted that Covid had some upside for Sky as it boosted numbers to its various streaming services. He noted that Neon continued to add subscribers despite a 16 per cent price increase to $16 per month in April.
Sky TV chief executive Sophie Moloney. Photo / File
At the same time, the loss of customers from its satellite business was slowing.
Dekker and Nguyen expected Sky to earn a "meaningful margin" on its new broadband service and saw its new box, due in June next year, as a positive.
The new, Android-powered Sky box will deliver the pay-TV broadcaster's regular channels over UFB fibre rather than satellite, and offer frills such as a voice-activated remote, 4K ultra high definition and support for third-party apps such as Netflix, Disney+ and Amazon's Prime Video (Spark Sport is still an open question).
