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SKY is not the limit for pay-TV outfit's shares, Liberum says

Sky is having to pay more and more to secure sporting rights and Liberum doubts its ability to pass these costs on to subscribers

Bundesliga champions Bayern Munich
Liberum updated its estimates following the recent Bundesliga rights auction

The Liberum media team expects the shares of pay-TV pioneer SKY PLC (LON:SKY) to continue falling to earth.

The shares are off almost 25% year-to-date and Liberum expects that trajectory to continue.

Cost inflation is persisting, as indicated by an average increase of around 80% for the rights to broadcast footie games from the German league, and the company could struggle to pass these increased costs on to customers.

On top of that, the company faces increased competition from its rivals such as BT Group PLC (LON:BT.A) and Virgin Media Inc (LON:VMED, NASDAQ:VMED), plus over-the-top services such as Netflix Inc (NASDAQ:NFLX) and Amazon.com Inc (NASDAQ:AMZN), which are taking market share.

“We have updated our estimates following the recent Bundesliga rights auction, which led to an average per season cost increase of c.80% compared to their last contract. We have also updated our FX assumptions to GBP/EUR to 1.20 from 1.40 and GBP/USD to 1.31 from 1.43, although Sky hedges the majority of its FX risk,” Liberum revealed.

After these changes the company’s forecast for the current financial year is 15% below consensus earnings per share (EPS) estimates, and the divergence gets wider in the following two years – the broker is19% below fiscal 2018 consensus and 27% below for the year after.

The target price, based on a discounted cash flow model, is 630p and the recommendation is ‘sell’.

Meanwhile, SKY continues in its quest to make it impossible to have a quiet drink in a pub without being distracted by hyperbolic coverage of football.

This week will see the launch of Friday Night Football, which promises – or threatens – to put the emphasis more on entertainment than heavy tactical analysis.

If that is the case then the choice of a side managed by Jose Mourinho, whose sides are normally long on tactical discipline and short on entertainment, as one of the teams in the first Friday night fixture could be deemed unfortunate.

Mourinho’s Manchester United welcome Southampton on Friday night, and Sky will commence coverage at 6pm from a Manchester pub called The Dive Bar, which is not believed to have taken its name from the signature move of Ashley Young.


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