'Lacklustre' BSkyB, forecasts reduced

Chris Forrester

Next Thursday (April 30) BSkyB will unveil its Q3 results (for the period to March 31). Investment bankers Morgan Stanley, in a pre-results note to investors, suggests the quarter’s trading might have been “lacklustre”. The note ends with the bankers marking down their target expectations for Sky, from 570p to a disappointing 460p. BSkyB’s shares immediately tumbled a further 6p (1.3%) to 429p.

In fact Sky’s share price has been highly volatile this past quarter, dropping to barely 400p in January, but two weeks later touching 500p (and the 1-year high has been as good as 549p, with a 12-month low of 329p). So as the advice says: ‘you pays your money, and you take a chance..’.

The bank’s note reminds readers of BSkyB’s loyal subscribers, many virtues and core resilience, “but is less financially resilient”. The note highlights some of Sky’s profit centres, all of which are likely to be suffering in the downturn, including advertising, income from pubs & clubs, Sky Bet and broadband content, which total 17% of 2008-9 revenues.

The bottom line is that Morgan Stanley expects net subscriber additions to be around 37,000 (56,000 this time last year), and that churn will rise above the psychologically important 10% level to 10.7% (10.5% this time last year). ARPU expectations are for £445 (£424). The one high spot is in the number of HDTV additions. The bank expects 175,000 (the pre-Christmas number was 188,000).

The bank is also worried about Sky’s forward obligations in terms of capital expenditure. It cites both Virgin Mobile and British Telecom’s huge commitment to broadband (and fibre to the kerb, in BT’s case) and raising ‘super-fast broadband’ throughput to 40Mb-50Mb and perhaps more over time. Morgan Stanley expects Sky to respond in due course. “This could mean capex of £675m-£785m over three to four years and meaningful initial start-up costs. Timing and scale of incremental investment is uncertain. Our new [Discounted Cash Flow] valuation is 460p.”