Project Migrate's Completion Will Improve Service Reliability And Drive Future Content Delivery

Key Takeaways

• Completion of Project Migrate and transition to IP will enhance reliability and customer retention, positively impacting future revenues and net margins.
  
• High-impact content and sports events, along with increased streaming revenue, may boost viewership and future earnings growth.
  
• Disruptions from Project Migrate and market competition could challenge revenue growth and margins, while satellite issues risk customer satisfaction and churn.

Catalysts

An entertainment company, provides sport and entertainment media services, and telecommunications services in New Zealand and internationally.

• The accelerated satellite migration project, Project Migrate, is expected to improve revenue generation once completed, as it will allow Sky to focus on content delivery rather than infrastructure issues. This could positively impact future revenues.
  
• The transition to IP switchover capability for the new Sky Box enhances service reliability, potentially improving customer retention and reducing churn, thereby providing a positive impact on future net margins.
  
• Upcoming high-impact content titles and sports events in H2, like The White Lotus, The Handmaid's Tale, and Super Rugby, are expected to drive viewership and attract more subscribers, boosting revenue prospects.
  
• Increased take-up of the streaming service Sky Sport Now, with record revenues and a price rise, indicates potential future revenue growth in digital services, which could enhance earnings growth.
  
• The sport programming strategy, including co-exclusive agreements like ESPN, aims to manage and potentially reduce costs, which could improve net margins while maintaining the attractiveness of the service offering.

SKY Network Television Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SKY Network Television's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 5.2% in 3 years time.
• Analysts expect earnings to reach NZ$39.8 million (and earnings per share of NZ$0.32) by about March 2028, up from NZ$18.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$63.5 million in earnings, and the most bearish expecting NZ$22.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 18.4x today. This future PE is lower than the current PE for the AU Media industry at 18.2x.
• 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 6.91%, as per the Simply Wall St company report.

SKY Network Television Future Earnings Per Share Growth

Risks

• The accelerated timeline for the satellite migration project, Project Migrate, disrupted revenue-generating initiatives and impacted the company's revenue line during the first half of FY '25. This could continue to affect revenue in the near term.
  
• Up to 5% of Sky Box customers experienced unexpected reductions in signal strength due to the satellite issues, resulting in increased contact center and technician costs. This might affect customer satisfaction and lead to customer churn, impacting revenue stability.
  
• Revenue-generating activities were delayed due to the distraction caused by the satellite migration and a tougher economic climate, which could hinder revenue growth and financial recovery in the coming quarters.
  
• The programming cost profile was heavily weighted in H1, putting pressure on EBITDA, which was down 25% year-on-year. Ineffective cost management or delayed cost reductions could continue to impact net margins negatively.
  
• Slower than expected growth in Neon and increasing competition in the streaming market could affect revenue from this segment. Despite some growth, the market's dynamics may challenge overall revenue and earnings contributions from streaming services.

Valuation

• The analysts have a consensus price target of NZ$2.855 for SKY Network Television based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$3.25, and the most bearish reporting a price target of just NZ$2.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$768.3 million, earnings will come to NZ$39.8 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of NZ$2.43, the analyst price target of NZ$2.86 is 14.9% 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.