Description

Quick Summary

Sky Perfect JSAT (SKYP, ticker-9412 JP) is the leading Japanese provider of multichannel pay-tv (25% market share) and and Asia's largest satellite operator (5th largest globally)  for broadcast, communications and govt end markets.  The company is the largest pay-tv provider in Japan and the largest satellite operator in Asia (#5 globally).  The stock is interesting because current results  significantly understate earnings power because of the current losses produced by the multichannel business as a result of a significant investment to transition subscribers from SD to HD which is scheduled to be complete in May 2014.  Going forward, multichannel earnings should grow dramatically as excess expenses are removed and subscriber numbers rebound after the distracting switch.  Furthermore, even at a severe discount to peer multiples, the satellite side of the business more than covers the company's current EV if valued independently.  Upside could exist to JPY 850-1050 (~60-100%) while downside is well protected in the mid 400s (~-10-15%) which is an attractive risk-reward. 

Capitalization and Valuation

SKYP has 308mln shares net of treasury shares for a JPY 160bln mkt cap at JPY 520 per share.  At 3/31/14 the company has JPY 63.8bln of cash and JPY 46.0bln of debt or JPY 17.8bln of net cash for a stated EV of JPY 143bln.  FY 14 (3/31/15) sales are expected to JPY 164bln (0.9x) and EBIT is expected to be ~JPY 18bln (8x) with EPS of JPY 39 (13x). 

 Upside

SKYP's multichannel business is currently subsidizing STBs at a cost of JPY 4bln per year for the SD-HD upgrade which will left with the elimination of SD broadcasting in May 2014.  The company has also consolidated 3 broadcast centers (extra one used for SD service) to 2 in FY 14 which should lower costs by JPY 2bln.  Through the elimination of these expenses, the multichannel business should improve from +1bln of EBIT in FY 13 to +7bln of EBIT in FY 15.

There is also further upside from the end of this transition although it is a bit more difficult to quantify with any precision., the shift to HD has led to elevated churn levels as some SD customers churn out instead of upgrading.  In FY 14, annual churn is expected to be ~23.9%, but is only ~16.6% if you remove the effect of terminated ST customers. For FY 15 and going forward, churn should decline driven the end of the HD migration (before start annual churn was 15-16%) and the fact that HD subs have a much lower churn level than SD subs (0.8% monthly vs. 2.1%  at Q3 13).  While difficult to quantify with any precision, this lower churn would have a material impact on EBIT.

Finally, HD subs have higher ARPUs than SD subs (~2,900Y vs. 1,700Y) and the continued mix shift has led to growing ARPUs at SKYP.  The mix shift of moving the final SD subs with HD subs could add incremental revenue and drive another 1bln+ of EBIT. 

The satellite business also should continue growing slowly (overseas expansion, new government contracts, Ultra HD increasing transponder demand) and could add an incremental 1-2bln of EBIT over the next few years. 

Overall, total EBIT could reach 25-30bln compared by 18bln in FY 14.  At 25bln of EBIT, SKYP would generate ~JPY 50 of EPS which would suggest a JPY ~850 share price at 17x EPS and 10x EBIT/5x EBITDA.   SKYP would be worth JPY 865 at a 6% normalized FCF yield.

At 30bln of EBIT, SKYP would generate almost JPY 60 of EPS which would be ~JPY 1,000 at 17x EPS/10x EBIT/6% FCF yield. It should be noted that 10x EBIT is ~ 5x EBITDA, well below peer levels.

SKYP has also shown a willingness for shareholder friendly capital allocation.  In Dec 2013, the company bought back 8.4% of the shares outstanding (most from major shareholder Sony, rest in the market) at a price of JPY 548. 

Downside

Downside should be protected by the company's strong balance sheet (net cash) as well as the very stable satellite business which generates ~18mln of EBIT.  At 7x EBIT (most satellite op comps trade at 14-16x EBIT), SKYP would be worth ~JPY 470 per share or 15% downside.  This valuation is similar to 13x these lower earnings. 

Another way to look at downside protection is that satellite peers trade at ~8-10x EBITDA and #4 Telesat is rumored to be being acquired for $6.5bln which is ~9x 2013 EBITDA.  If we value SKYP's satellite business at half of the Telesat multiples (4.5x CY 13 EBITDA) then its implied EV is 167mln with an implied share price of JPY 550 with 0 value being attributed to the multichannel business.

It should also be noted that JPY 450 would be ~80% of tangible book value for a stable, cash generating business.

Catalyst