Shares in satellite television broadcaster Sky (LSE: SKY) bumped higher this morning, after the group delivered a solid set of interim results and announced the appointment of James Murdoch as chairman.
During the six months to 31 December, Sky’s revenues rose 5% to £5,718m, while adjusted operating profit rose by 12% to £747m. That’s slightly ahead of City forecasts. The interim dividend will rise by 2% to 12.6p.
Sales growth was helped by 337,000 new subscribers in the UK and Ireland during the last three months of 2015. That’s the highest level of growth in 10 years, according to the firm.
Sky appears to be on track to meet full-year forecasts. This implies a forecast P/E of 17, and a prospective yield of 3.3%. However, profits are expected to fall. Current forecasts suggest that earnings per share will fall by 9% in 2015/16 and by 7% in 2016/17, despite rising revenues.
One reason for this is Sky’s net debt of £5.7bn, which is the result of its acquisition of Sky Italia and Sky Deutschland last year. However, this net debt fell by £600m over the last six months. I’d expect Sky’s strong cash generation to deliver further reductions quite quickly, after which earnings and shareholder returns may improve.
Sky versus ITV?
Shares in ITV (LSE: ITV) have risen by 230% over the last five years. The company has reinvented itself as a programme producer and made a string of acquisitions aimed at retaining the production and syndication profits from popular programmes. Advertising spending has also been more resilient than expected.
All of this has helped reduce ITV’s dependency on advertising. It also helps compensate for ITV’s lack of a dedicated subscriber base willing to pay for unique content. This is a key advantage enjoyed by BT and Sky, in my view.
ITV’s earnings remain on an upward trend. Post-tax profits have doubled to £528m since 2011, and earnings per share are expected to rise by a further 11% in 2016. Debt levels are relatively manageable and the forecast yield of 3.3% should be amply covered by free cash flow.
Based on these figures, ITV’s forecast P/E of 14.5 seems quite reasonable. I believe the main risks to watch for are any signs of weakness in advertising revenues, and any indications that ITV’s recent acquisitions are failing to produce successful new shows.
What about BT?
BT Group (LSE: BT-A) will shortly complete its acquisition of EE. The firm will then be able to offer television, broadband, landline and mobile services. It should mean that BT can equal and perhaps better Sky’s new Fluid Viewing service, which enables customers to switch between devices while watching a programme.
However, BT also has high debt levels and a big pension deficit. The group will also need to invest in combining EE with its own operations and stripping out as many costs as possible. The latest consensus forecasts suggest that BT’s earnings per share are likely to be fairly flat, at around 31p, over the next couple of years.
In my view it might be worth waiting to see how easily BT manages to generate organic growth from its enlarged business before deciding to buy. Such a big acquisition carries significant financial and operational risks.