Hong Kong investor still sees gold in Sky TV

Boutique fund manager Black Crane Capital isn't deterred by Sky Network Television's plunging share price and soaring bond yield, building a sizeable stake on the expectation the media group will emerge as a key content aggregator.

The Hong Kong-based investor has quietly built up a 5.1 per cent stake in the pay-TV operator since the end of January, spending about $17.3 million, or an average 35.2 cents a share.

That might look expensive when the share price closed on Friday at 26.5 cents and has traded at low as 19 cents, but founder Peter Kennan disagrees.

"We specialise in taking the reverse side of that," he said.

His firm typically holds between eight and 10 stocks and is happy chasing value in complicated and difficult situations that other firms shy away from.

Black Crane already has experienced in New Zealand, buying into Chorus when the network operator's shares were trading around $2 at the height of its regulatory uncertainty. That stock closed at $6.62 last week, and the Hong Kong firm is still making submissions on Chorus's regulatory framework.

Kennan said Sky has good form in generating solid margins from content and years of data on what New Zealanders want to watch and what they're willing to pay for.

"The core asset is a subscription business that's valuable," he said.

The pay-TV operator had 925,000 customers in February after taking over the Lightbox entertainment streaming service established by Spark, and slowed customers losses on its once-dominant satellite service.

While Kennan expects the business to go through a major transformation, he anticipates satellite services will continue for quite a while.

He doubts every content provider will want to have a direct relationship with consumers in the small New Zealand market, but Sky is well-placed to do so because it has retained rugby screening rights.

Sky has grappled with the rise of on-demand streaming services such as Netflix and unexpected competition for premium sports in the form of Spark New Zealand.

It has ceded the domestic cricket season but doubled down on rugby, as it threw in equity to New Zealand Rugby as part of the deal to secure the SANZAAR broadcasting rights.

It had tried to veer into telecommunications in a tie-up with Vodafone New Zealand but was blocked by the Commerce Commission in 2017. Long-term chief executive John Fellet and chair Peter Macourt left the business shortly afterwards.

Since then, Sky has preserved cash by cutting out dividends and freshened its leadership under new chief executive Martin Stewart.

Kennan said Sky was a very solid business under Fellet, and he's confident about Stewart's pedigree, which includes successful stints at BSkyB and Dubai's OSN.

He plays down the spike in Sky's listed bond yield to as high as 80 per cent last week. With $100 million due for repayment in March next year, Kennan says the company can sell assets to help meet that bill.

While a large portion of Sky's assets are programming rights, it also owns property in Auckland, which it valued at a net $43.7 million at the end of June last year.