Description

Sky has a mix of attractive attributes for value creation: a) 40% of market cap in cash b) dominant and only satellite provider with roughly 20% of the population New Zealand  and 33-40% of NZ households as subscribers that watch 120 minutes a day c) tied up the key sports rights and spends nearly $330 million a year on content d) trades at sub 2x EV/EBITDA (adjusted for real estate sale/1H22 results) e) wildly overcapitalized with untapped line of $150 million + $160 million in cash* +/- vs. $400 million market cap f) decent business $740 million in revenue with $140 million in EBITDA or roughly 20% EBITDA margins and 10% free cash flow margins.

* Current cash $73 million + our estimates for 6-30-22: 1H22 $45 million from operations- capex + $55 million from real estate sale that closed in Feb 2022 or $173 million or 42% of the market cap! 

We estimate that Sky could pay a special dividend equal 75% of the current share price or $1.80 per share by paying out the cash that is about to hit their books (re sale + fcf) + levering the untapped credit facility to 1.0x EBITDA. On a $2.40 stock with roughly .75+ cents in cash per share, the sell side has cash flow per share for 2022: .80 cents 2023: .75 cents and 2024 of .71 cents. Sky has laid out their growth plans which we think make sense. We believe the likely outcome will be a PE acquisition at a substantially higher price. Finally, we think there is very little downside in SKY and the opportunity for 100%+ upside or 5x EV/EBITDA. We believe Sky has barriers to entry in the form of dominant distribution for the country combined with tying up key sports rights that lead to good retention.

Plan to unlock shareholder value/catalysts:

We believe it is likely that a combination of a substantial dividend and large share repurchase is highly probable over the next 90 days or so. The company is hinting at roughly a 9-14% dividend which should begin in September 2022 (as the company will pay out 50-80% of free cash flow or .20-.32 cents a share, see page 28 of Feb 2022 IR deck). We see a couple paths a) a large dutch tender b) special dividend + stated ongoing dividend or c) holding cash with the above. We believe the most likely path is a large special dividend of up to 33% of the market cap or .75 cents could be paid out then followed with the above suggested payout of .20-.32 cent dividend. If this occurs post the special dividend, the payout would increase the dividend yield to 13-19% after backing out a one time special dividend. The company should be able to easily support both a large special dividend and ongoing dividend w/o much debt given the company has an untapped line of $150 million, $140 million in EBITDA, and a highly predictable subscription business. Sky is likely worth 5x EBITDA + Cash or roughly $5 per share vs. $2.40 per share.

Satellite is especially well suited for New Zealand given the topography and small regional towns make it costly and challenging to cover the entire country as Sky can.

Overall, the market is pricing in continuous declines in revenue and subscriber-base whilst the company has already returned to revenue growth. Unbundling has run its course (and/or has been oversold) and Sky is well positioned as it has strong distribution – e.g. even Disney, after testing unbundling, came back to Sky for their access to consumers. See this article written by Sky director in early May “How goes the Revolution” regarding unbundling and Sky’s market position:

https://www.linkedin.com/pulse/how-goes-revolution-mike-darcey/

Sky motto “Home to Sport” and has the key sports rights to All Blacks rugby, premiere league soccer, cricket and others.