With British Sky Broadcasting Group (LON:BSY) currently being bid for it was certainly helpful that full-year results were robust. This will push News Corporation to offer a fuller price if it is serious about taking full control of the group. Even if a bid does not go through Sky in our view still offers an attractive investment with good growth prospects.
In recent months the media space has provided more drama than much of the programmes it produces. Sky has been continually aggressive towards the BBC and specifically the Internet TV project called Canvas which the BBC is helping to develop. Meanwhile, regulators in the UK and Europe meanwhile have focused on Sky’s dominance with the latest assault being on the group’s strong position in movies. And what’s more the company is also the subject of a bid from News Corporation which already holds a significant stake in the group.
Turning to the financial results for year to June 2010 revenue was up by 11% and operating profit up 10%. Perhaps more importantly for stockholders earnings per share jumped by 20% to 31.1p while free cash flow increased by 23%.
The operating performance was driven by an increase in customers from 9.4m last year to 9.9m at the end of June which is a rise of just over 5%. Additional subscription products came in at 11.7m versus 8.1m a year ago which is strong growth and highlights that the Sky story is about existing customers taking up more services. Churn has been stable at 10.3% but this is much lower than the figure of 12.4% in 2007.
Clearly as Sky grows it is also becoming more efficient through economies of scale. Operating costs as a percentage of sales have fallen from 45.4% in 2008 to 44.6% in 2010. However, excluding the investment in HD this figure would fall to an impressive 40.7%. This demonstrates that Sky is an efficient operator that has sought to make the group a lean operation while also investing in technology and content. The net result was that the fourth quarter saw the highest quarterly operating margin in two years at 15.5%.
On the bid prospects clearly Sky has to remain tight-lipped but these results provide one answer to News Corporation i.e. that the group is in good shape and deserves a full price. In our view, Sky has now become a growth…
