SHAREHOLDERS in British Sky Broadcasting, the satellite television
venture, have come down to earth since the company made its stock market
debut in London and New York on December 8.
The shares had been offered at 256p, which was at the top end of the
previously disclosed range of 233p to 268p because of the heavy demand,
and immediately went to an 11p premium. Yesterday, though, they fell 10p
to around 245p despite some bullish news about the level of subscribers.
Not too much should be read into this perhaps but there were analysts at
the time who felt the issue was over-priced.
There was, however, plenty of cheer from Sky Television so far as
viewing figures are concerned. It has added a net 180,000 direct to home
subscribers in the last three months of 1994. Of these new subscribers,
more than 70% have signed up for all Sky's premium channels and are
paying the top monthly subscription rate of #22.99.
The company reports that the high level of sales in this period has
included a new record for a single week's sales of 37,241 which was
achieved in the third week of December.
Sky's home subscriber base has increased by 7% from 2.64 million to
2.82 million over the three-month period. At the same time, there has
been a decrease in the level of subscription cancellations from 12% in
the second six months of 1993 to 10% in the second half of 1994, despite
the October 1994 price increase. For December alone, the cancellation
rate was 7% compared to 8% a year ago.
Research figures for January also show that the total number of homes
that subscribe to Sky is above four million for the first time.
It all sounds pretty healthy. As Sky TV's chief executive Sam Chisholm
points out, the growth in subscriptions, in part at any rate, is a
result of an enhanced profile as a result of the recent successful
flotation.
Yesterday morning, though, BSkyB was the second most actively traded
stock as sellers emerged. It was the penultimate day of the shares
stabilisation period during which advisers buy and sell shares in the
market to smooth out initial volatilities.
However, stockbroker Henderson Crosthwaite's sector analyst yesterday
issued a sell recommendation suggesting that the #4400m valuation put on
the company at the 256p offer price was too high.
It considers that without market support, the share price will decline
to the 200p level, where the market capitalisation would be #3400m,
though Henderson itself values BSkyB at only #2600m. The analyst
considers that the company will be unable to sustain the rate of profit
growth implied by a market valuation of #4400m.
That said, dominance in the two most lucrative areas of subscription
TV, films and sport, is expected to ensure success. It is not the
company, but the value placed upon it that is criticised. This caution
stems from profits depending on continuous growth in penetration via
cable and satellite. On that score the projections for penetration by
Henderson's analyst are lower than most market estimates.
Sky penetration is forecast to rise to 27% of homes by 2000-01 from
15% in 1993-94.
There are also worries that competition from the cable industry and
future terrestrial TV will drive programming costs higher with few
potential high earning new services that could be added.
It is argued that new services will anyway be more expensive to
introduce and constraints on the capacity to add new services will make
it harder to introduce price increases which are more acceptable to
subscribers if a new package is being sold.
Caution is also expressed about what happens early in the next century
when there is a big jump in programming costs as a result of the
renegotiation of the film contracts. It could lead to a period of profit
stagnation or decline as the company adjusts to the new cost regime
though this risk could be offset by judicious investment of cash flow.
Forecast profits for BSkyB for 1994/95 are #194m, rising to #264m the
following year and #321m 1996/97.
Henderson's assessment of BSkyB's prospects and valuation may be
somewhat less than the general market view and may well be wide of the
mark. However, some of the the initial euphoria after the marketing hype
was bound to wear off.
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