Random Stonk of the Week - Sky Network Television (SKT)

2022.01.22 20:18 yothuyindi Random Stonk of the Week - Sky Network Television (SKT)

Random Stonk of the Week - Sky Network Television (SKT) Each week I'll be picking a random ASX stock that I've (personally, yes I'm aware it may have been covered at some point in history) rarely seen discussed online - and that I do NOT hold - that you voted for, for us to dive into for some "DD".
This is for us to have a look at what it does, comb over their financials, and in the end discuss whether or not we'd buy into it. Not all of these stocks may be sexy or appealing; the whole point is to shine a light on what companies are doing out there on the ASX which never get much coverage - for good or bad.
The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here's this week's Random Stock of the Week.
Company name: Sky Network Television Ltd
A knife that would make Nevelo jealous
Ticker: SKT
Industry: Media
Headquarters: Auckland, NZ
Market cap: $396m
Current share price: $2.27
P/E ratio: ~9
1-year Performance: +56.5%
What they do, smoothbrain version: spam Kiwis with junk reality TV and dated show re-runs, along with like, heaps of rugby, bru
What they say they do, wanky version: "We’re all about bringing you the very best sport and entertainment. Whether you’re ready to sit up and cheer every All Blacks and Silver Ferns match, binge on the entire series of Game of Thrones, get to grips with what’s happening to our planet, or laugh and cry over classic movies, reality TV or local and global nail-biting drama, it’s right here." 🍆👋
What they do, actual version: Sky Network Television are a New Zealand-based satellite & digital TV provider that broadcast a wide range of licensed and original produced shows and live events.
Oh and, one important thing to note before we get into it: despite their name, no, they're not affiliated with "that" more controversial news outlet of the same name that operates elsewhere in the world.
Headquartered in Auckland, the company currently services a base of nearly 1 million customers; pretty impressive considering the total population of NZ is only just over ~5 million all up.
As a dual-listed company on both the ASX & NZX, the company does not get much play or media attention here in Australia. However by market cap, it ranks within the NZ50 index and thus making it a regular part of ETFs which track this index as a whole.
Member ugly satellite dishes on houses in order to watch shows? I member...
They have been around for quite a while. Founded back in 1987, Sky have been a satellite-based "Pay TV" broadcaster for the majority of their existence, beaming a wide range of shows - chiefly sport - through the sky (the name makes sense, see?) and into the homes of Kiwis across the country.
In many ways, Pay TV businesses were the model for the modern "SaaS" (Software As A Service) type companies to exist; something that's come around full circle with Sky today in the present day.
SKT listed on the ASX back in 2005, and had around a decade worth of up-and-down share price performance during its earlier years on the market.
It hit its peak in August of 2014, after which it embarked on a drastic down-trend for over half a decade: a period marred with failed merger attempts, declining subscriber numbers, and a dated technology and pricy infrastructure model that left shareholders' wallets bleeding.
It didn't help that all of this coupled with the emergence of digital-first streaming platforms such as Netflix and its clones, which popped up with more easily scalable business models, flashy marketing, and perhaps most importantly: an impressive catalogue of content.
Sky had become a bloated, asset-heavy business at this point, in danger of becoming a stubborn dinosaur - and eventually going extinct.
The SKT chart starts looking a lot better if you zoom in a little.
However, instead of remaining set in its boomer-ish ways and refusing to adapt, at the end of 2019 Sky began the first steps to what is looking like a massive turnaround; one that's saved their balance sheet, slashed unnecessary assets, and embraced a new digital-centric model that looks to have positioned it in a much better place moving forward.
Can they complete this reversal of fortune completely over the next few years? Let's take a look...
What looks good:
  • The impressive rise from the ashes of Sky coincided with the hiring of a new CEO and input from seasoned executives with experience at the likes of Foxtel, who cited the need to switch to digital-first business models, and were able to do so remarkably quickly.
  • Formerly satellite-only, the company made a big push - that coincided with the Covid-19 pandemic onset & people staying at home more giving it an extra nudge - into digital adoption. They've changed their business model to now offer both their traditional 'Sky Box' satellite system as well as newly-added streaming services for an integrated offering in the one box. It's a hybrid approach, where one is designed to gradually phase over to the other as time goes by. This is in addition to their existing free-to-air TV offerings, and advertising income, for a mixed media & revenue portfolio.
  • User numbers have grown, over recent years, spiking in 2020, however the types of user has changed. Their streaming userbase was up 57% year on year for FY 2021, and revenue from the same source up 24%; the company is aiming for it to provide an average of ~20% revenue growth each year over the next 3 years.
  • They've introduced new products to add to the bottom line: a Sky Broadband package (which includes Disney+) and RugbyPass (a subscription based portal for everything-rugby), aiming to grow these to ~10% of total revenue over 3 years, adding potential additional revenue sources.
  • This digital switch has also allowed the company to move to a more cloud-based infrastructure, reducing the cost of extra rollouts and the capex required for infrastructure moving forward, and scaling back their physical footprint via selling off such assets (including buildings & land). It resulted in almost ~$20 million less capex in a year, which was just one part of a bigger movement towards slashing unnecessary expenses and streamlining costs in multiple ways.
  • They'd been losing their satellite customers gradually, but started offsetting this with the pivot to digital. As a business, in addition to pure customer numbers their key metric to focus on is “ARPU”, or Average Revenue Per User; while this has declined slightly from Sky Box users over time, the addition of the streaming channel has more than offset this since it's become part of the revenue stream, making the total ARPU figure higher overall since the 2019 pivot:
ARPU = Average Revenue Per User, not the now-cancelled owner of the Kwik-e-Mart
  • The other key stat for subscription-style businesses - and one that can gradually eat into revenue if it's not addressed - is customer churn. Essentially a "dissatisfaction score" as customers leave, keeping the churn % as low as possible is crucial. Over the past 3 years, Sky have reduced their churn rate from 15.3% down to 12.2%.
  • All of this combined lead to a 130% increase in NPAT year on year; in all, the turnaround has been impressive so far, with the company seeing revenue growth for the first time in over 5 years.
  • This also meant they outperformed guidance forecasts - twice - which gave the share price a couple of nice ‘shots in the arm’ that it hadn't seen for a loooong time.
  • SKT have also sold off assets in order to generate a war chest of cash, with many of their older physical assets no longer necessary. They sold off their Outside Broadcasting assets for just under a $6 million profit, and more recently their Wellington campus for the total sum of $56m (which is yet to be reflected in earnings reports).
  • They also consolidated their physical base into their central hub in Auckland, cutting down their footprint; with all of this extra money, they are forecast to return to paying a dividend, with their future divvy policy currently being reviewed.
  • SKT underwent a share 10:1 price consolidation in September 2021 to reduce a ballooning number of shares on issue from its underperforming years, and now boasts a much cleaner share register.
  • In addition to slashing operating costs, they have been continually working to reduce debt levels, which were quite large in the past; the balance sheet looks much healthier nowadays.
  • “Content is King” for media companies looking to retain subscribers, and they are only as good as the content they have the rights to. Sky have had numerous wins in this department recently: they recently signed an expanded deal with WarnerMedia which included some alluring content rights, including for American prestige TV station HBO/HBO Max, Warner Bros, DC comics & also to crank out more original NZ-made content, but...
  • ...while these are all nice, it’s sports that continues to differentiate itself as a must-have content line for paid streaming services. Its “real time” nature separates it from movies, TV shows, etc. which are static once produced and can be watched any time; or signed up for a short period, binge-watched, and unsubscribed.
  • It's a good thing then that Sky recently won long-ish term content rights to lock in as NZ’s Rugby League & NRL broadcaster through to 2027, which helped decrease customer churn. Kiwis are rugby-mad, and this is a significant win as an alluring piece of content to paywall. This is in addition to rights already in place with Foxtel, ESPN, CBS and more, making for a pretty solid lineup of programming.
  • Compared to its fellow ASX-listed media peers, SKT currently still looks quite undervalued both in terms of its earnings and assets, trading at a P/E of around 9 at time of writing:
Sky looks fairly \"cheap\" as far as ASX-listed media companies go.
  • Over the initial "down" period for sports when Covid first threw things into disarray, they were able to negotiate a reduction in partnership costs with a number of sports code partners.
  • They now have a scalable revenue model that positions them fairly well for a potential inflationary environment; they've already successfully implemented a 14% price rise in their core streaming platform with little loss of userbase
  • With the upcoming closure of New Zealand's Vodafone TV, current users of that platform will be migrated over to Sky's platform and be integrated as part of their regular revenue in upcoming reports
What doesn't look good:
  • Next year, those juicy content rights costs will likely ramp up again as more events & sporting (including fees paid for the Tokyo Olympics) factor in to upcoming earnings results.
  • This turnaround "looks" great in the short-term, but it remains to be seen how sustainable it is; having things go digital just as Covid decided to keep everyone inside may not be a true indicator of how those subscriber numbers will sustain in the long-term. It's hard to shake off the lingering negativity from what was around an incredible 98% loss in share price value over the 6 or so years prior to the company's recent turnaround.
  • Future growth is going to be the main challenge. It's hard not to think that pandemic-induced boredom is a large reason most subscription services boomed in the short-term; management's aim for 20% growth seems ambitious given their current growth rate and the massive tailwinds they had behind them to help bump numbers up over the past couple of years.
  • The fact they needed to employ "outside consultation" to advise what to do about paying dividends is a little concerning. Will they go the dividend route, look at buybacks, or do something stupid with the ~$130m of cash they'll have after their campus sale goes through? This could swing share price sentiment greatly.
  • Ownership consists of a large proportion of institutional investors & funds, and minimal ownership by the executive team. We always tend to prefer companies where the execs have more skin in the game.
  • The costs of producing more in-house content will likely take away from the bottom line; they're aiming to ramp up additional sports documentaries and other complimentary shows of their own.
  • Advertising revenues were down fairly significantly over the past year or two; Sky will want to prove those were just temporary pandemic casualties, and that they can claw the money back over the next few financial periods.
  • Many people still have those ugly-ass satellites on their houses in NZ. Was there no possible way their design could have been updated in the last ~20 years to something more ergonomic?
  • Their broadband rollout took a longer time than was initially announced; the introduction of their new Sky Box is likewise taking longer than what the distribution of such an Android-based device probably should as well.
  • The selling off of assets and implementing alternative working operations/environments makes sense in a Covid-world, but will some of it come back to bite them if things 'normalise' more in the coming years? Will they retain a flexible working environment that can justify smaller office space costs etc. moving forward?
Add it all up, and this is a traditional company “going digital” in a big way, in all facets of the business. How it was allowed to continue for so long in its previous format with so much fluff & wastage is a bit boggling, and shareholders must have been pulling their hair out for several years because of it.
However, they now seem determined moving forward to keep trimming the fat and keeping things lean & mean.
Even in addition to the streamlined infrastructure mentioned above, simple things such as reduced marketing spend / reliance on external agencies also resulted in cost reductions.
Meanwhile, Sky's digital integration also included the acquisition of a Sports Analytics company, which provides data insights to be used to maximise user growth & marketing opportunities.
Media companies in general have been some of the bigger ‘winners’ of the onset of the Covid-19 pandemic.
They also have implemented this idea of integrating data & engagement analytics throughout, which also allowed the company to cull certain programs the numbers proved people simply weren’t engaging with. This led to additional savings on licensing rights for these less-viewed programs, via either re-negotiating their contracts, or simply cutting them entirely.
This analytics-driven approach is a necessary switch that most ASX media companies - even the big market cap dinosaurs - have gradually started to realise.
Media companies in general have been some of the bigger ‘winners’ of the onset of the Covid-19 pandemic; particularly those who were digitally savvy from the get-go. More people staying home meant more eyes online; the pandemic gave news outlets endless stories to pump out as people continued to be fearful; fear equalled clicks; and clicks equalled more revenue.
Sports also proved a welcome distraction for many, and Sky's heavy focus in this area certainly helped its cause despite some of the choppy stop-starts various sporting codes have experienced during the pandemic years.
Sky's new, slicker set top box will roll out later in 2022.
A focus on continued user experience and app improvements will also be key to keeping customers around/seeing added value.
They're aiming to roll out the new, sleeker version of their Sky Box set-top box later in 2022, which will have a slew of additional features such as built-in Android app & Netflix interfaces, 4K resolution streaming, and voice control (because why the hell not?).
Overall rating (strong buy/buy/hold/avoid): While the general sentiment from all the above seems overwhelmingy positive and would probably indicate a buy, I'd probably go with a "hold" until we see proof that the pandemic-induced boom wasn't just an anomaly.
That might not sound like a ringing endorsement, but given it would have rated as a "do not touch with a 10,000 foot pole" just a couple of years prior, it's certainly a massive step up.
As things gradually start to open up - and even with new Covid variants raging, people say 'screw it' and want to get out of their homes - subscription services like this may be some of the first discretionary expenses to be cut.
Sky will also have to pony up whatever additional licensing fees are required to retain all their key content after some of their short-term 'bargain' deals come up for renewal, which will eat into margins somewhat.
Still, the fact that they even do look appealing as an investment at all nowadays is a testament to the solid work of the management team in executing a viable plan in a relatively small amount of time. The end result is a much slicker and streamlined company with a pretty captive market and a solid level of market dominance in NZ.
Given its current financials, and compared to the rest of its ASX media peers, the share price does look fairly 'cheap' at time of writing if you believe that management can keep the good times rolling. Typical SaaS-esque companies that are more tech-focus typically trade at far higher P/E multiples than ~9, and with the pivot to digital that's essentially what Sky is becoming.
A lot of how the stock performs in the immediate future will also likely depend on what Sky decide to do with their excess capital policy; we've seen companies that come into large chunks of cash all of a sudden make some silly decisions in terms of acquisition.
If management do well in terms of an adequate capital return/dividend announcement/show continued streaming growth, this stock could re-rate closer to what it's worth based on its assets and revenue. If they rush into buying something stupid, they could kill the feelgood story before it's even properly been started.
Don't be those guys and ruin a good narrative, SKT.
Company website: https://www.sky.co.nz/
MarketIndex page: https://www.marketindex.com.au/asx/skt
Link to web version: https://ausinvestors.com/skt-stock-of-the-week/
Vote for next week's Random Stonk of the Week: https://ausinvestors.com/poll
Links to previous Stonks of the Week: https://ausinvestors.com/category/random-stock-of-the-week/
Feel free to add your own opinions on SKT in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
View Poll
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