Digital Advertising Scale And Long-Term Sports Rights Will Drive Strong Future Upside

Catalysts

About SKY Network Television

SKY Network Television is a New Zealand based media and entertainment company providing premium sport, entertainment and broadband services across satellite, IP and digital platforms.

What are the underlying business or industry changes driving this perspective?

• The integration of Sky Free and the ThreeNow BVOD platform materially expands Sky's reach into free to air and digital video, positioning the company to capture a larger share of the structurally growing digital advertising pool and lift group revenue and EBITDA from FY '26 onward.
• Long dated sports rights, including newly renewed New Zealand Rugby contracts and multi year deals in cricket, golf and northern hemisphere rugby, underpin Sky's status as the must have sports destination. This supports pricing power, higher sport pack penetration and more resilient ARPU and margins.
• Rapid adoption of the new Sky Box and Pod, which show churn that is more than 50 percent lower than legacy devices, is shifting the base to lower cost to serve, higher engagement digital products. This should stabilise subscriber numbers and enhance net margins over time.
• Scaling broadband to over 50,000 customers with healthy margins and network driven cost efficiencies creates a growing, recurring connectivity revenue stream that deepens customer relationships and supports earnings diversification beyond traditional pay TV.
• Strong momentum in streaming platforms Sky Sport Now and Neon, including successful subscription model changes and the rollout of ad supported tiers, increases recurring digital revenue while unlocking high margin, targeted advertising inventory that should lift overall earnings quality.

Assumptions

This narrative explores a more optimistic perspective on SKY Network Television compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming SKY Network Television's revenue will grow by 5.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.7% today to 6.0% in 3 years time.
• The bullish analysts expect earnings to reach NZ$53.3 million (and earnings per share of NZ$0.42) by about December 2028, up from NZ$20.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$40.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 23.0x today. This future PE is lower than the current PE for the AU Media industry at 23.0x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural decline in the legacy Sky Box business may continue to outweigh growth in streaming, advertising and broadband, as revenue already landed at the lower end of guidance and Sky Box still represents 62% of group revenue. This could cap top line growth and constrain EBITDA and earnings if migration to digital products is slower than planned.
• Persistent cost of living pressures and price sensitivity among New Zealand households, with management citing price as the primary reason for disconnections, could sustain elevated churn and limit the ability to push through future price increases. This may put ongoing pressure on revenue and net profit margins.
• Sky’s strategy depends heavily on disciplined content spending and long-term sports rights, including the renewed New Zealand Rugby deal that must stay within a programming cost target of 47% to 49% of revenue. Any revenue shortfall, weaker advertising market or overpayment for rights could cause programming costs to rise as a share of sales and compress EBITDA margins and earnings.
• The integration of Sky Free and the ThreeNow BVOD platform is expected to deliver material advertising scale and at least NZD 10 million of incremental EBITDA by FY 28. However, execution risk around systems, culture and synergy realisation, along with any slowdown in digital ad growth from current high teens CAGRs, could mean lower than expected advertising revenue and weaker group earnings diversification.
• Sky’s recent years of elevated CapEx on new boxes, pods, broadband and satellite migration have already driven higher depreciation and lower net profit after tax. With FY 26 CapEx still guided at 7% to 9% of revenue and additional integration and digital ad tech investment ahead, any misstep in monetising these assets could result in subdued free cash flow growth and pressure on the sustainability of the targeted NZD 0.30 per share dividend.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for SKY Network Television is NZ$4.1, which represents up to two standard deviations above the consensus price target of NZ$3.3. This valuation is based on what can be assumed as the expectations of SKY Network Television's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$4.1, and the most bearish reporting a price target of just NZ$2.29.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be NZ$887.9 million, earnings will come to NZ$53.3 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of NZ$3.38, the analyst price target of NZ$4.1 is 17.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.