Broadcasters are in the City spotlight, with an upgrade for Sky and positive comments on ITV.
The satellite broadcaster’s shares are currently up 3p at £10.77 in a falling market, after Credit Suisse raised its recommendation from underperform to outperform on the basis its growth prospects are not being fully appreciated. In a hefty 288-page note on European broadcasters, the bank said:
Our investment thesis for Sky is based on the medium-term earnings profile of the business, which is being underestimated by the market, in our view.
Whilst longer-term structural issues remain, we see the potential for solid earnings per share momentum in the coming years due to the following factors:
(1) Sky has the strongest content proposition in the European TV market, in our view, with two-thirds exclusive and owned content and this is locked in for the next 3-5 years. Higher English premier league costs will be offset by £100m from price increases and £200m cost efficiencies.
(2) UK and European consumers are ‘cord-nevers’ or are ‘cord-stacking’ rather than ‘cord-cutting’ content from Netflix [in other words taking...offerings such as Netflix as well as their existing pay TV subscription] and we expect this to also be the case for Amazon Prime and BT.
(3) Sky will derive additional revenues from transactions (Sky store, pay per view, Now TV Sport), ancillary products (HD, Sky Go, Now TV Movies and Entertainment, broadband, telephony and soon mobile), wholesale and advertising (as it combines its sales with Channel 5 to give a commercial revenue share that rivals ITV).
(4) Italy and Germany present a meaningful opportunity with £200m synergies plus strong subscriber growth in Germany as customers roll off old 24-month contracts.
(5) Sky is good value in our view, trading on 11 times 2016 EBITDA and 17 times 2016 earnings per share versus the European media sector (excluding internet) on 13 times 2016 EBITDA and 19 times 2016 earnings per share.
However Sky’s broker Morgan Stanley is less positive on Sky, with an equal weight rating:
After the impressive subscriber growth of 2015, the first quarter [of 2016] will look lacklustre with subscriber growth muted by the loss of the Champions League in the UK and Italy and a Ligatotal inflated comparison in Germany [when Deutsche Telekom subscribers migrated to Sky.]
Meanwhile Credit Suisse is also upbeat on ITV, giving it an outperform rating. However ITV shares are down in line with the market, 1.8p lower at 240.8p.
Meanwhile Ian Whittaker at Liberum has issued a buy recommendation on ITV, following reports that the BBC could axe The Voice - although this has been denied - and suggestions the corporation would be less likely to compete with commercial channels in future. Whittaker said:
The Daily Telegraph is reporting that the BBC will not get into a bidding war for The Voice, raising suggestions ITV will pick up the show (ITV’s Talpa business produces the show).
This follows comments from the Culture Secretary John Whittingdale that the BBC should not using taxpayers’ money to bid against ITV for rights. It also follows the announced departure yesterday of Danny Cohen, BBC’s long-standing Director of Television and a big believer in the BBC competing for audiences and programmes with ITV.
All this suggests a BBC that is likely to be less aggressive in chasing audiences, which should help ITV’s own audience share.
