Alun Morris takes a look at BSkyB which looks set to be a long-term winner.
The Spaghetti Western epic The Good, The Bad And The Ugly climaxes in a three way gunfight to settle who gets the gold. The battle between commercial television rivals BSkyB
(LSE: BSY)
, Virgin Media
(LSE: VMED)
, and ITV
(LSE: ITV)
won't be settled to the hypnotic music of Ennio Morricone but the tension is rising nonetheless.
But who are Clint Eastwood, Lee Van Cleef and Eli Wallach playing this time round? Many like to see Rupert Murdoch (the power behind BSkyB, a company run by his son) as the ruthless bad guy and Virgin's public face Richard Branson as the defender of the man in the street. ITV's Michael Grade isn't at all ugly but his viewing figures certainly are.
BSkyB's chief executive James Murdoch claims he is not distracted by Virgin's battle to force BSkyB to sell its 18% holding in ITV and Virgin's dropping of Sky channels from its network in a spat over fees. He must posses iron concentration not to say earplugs to ignore the fight that's started in the shop under his office.
Every season, churn, churn, churn
BSkyB delighted the market yesterday with 51,000 net extra subscribers in its third quarter and a lower hit to its 'churn' rate than expected. Churn represents the amount of customers that cancel during a given period. The figure was expected to rise following the ending of discounts to existing customers, but churn only rose 1.8 percentage points to 13.7%. Murdoch Jr. claimed the underlying figure is 11%, adjusted for 'offer riders' leaving the service.
Nine month operating profit (excluding the loss-leader free broadband, Easynet Enterprise and exceptionals) rose 8% year-on-year to £694m.
Real money-in-your-hand, however, is less impressive.
Pre-tax profit of £388m for the nine months was down 9%. Adjusted Earnings per share (EPS) fell 16% to 19.5p. Net asset value is about nil. Net debt has soared to £1.8bn, from £667m a year ago, largely due to BSkyB's grab of a slice of ITV in November. This raid blocked Virgin Media's plans to buy ITV and is the root of the megaphone war between BSkyB and Virgin Media.
While profits may be down, BSkyB is the master of the long game. Right from its inception eighteen years ago it's had the will and the deep pockets to take years of losses when introducing new services, most recently free broadband for TV subscribers, to grab market share.
Looking ahead, full year adjusted EPS is expected to be 27.5p, a 10% cut from 2006 and a big miss from the 36.7p forecast of a year ago. 2008 is forecast to show a 9% growth.
At 614p and a current year PE of 22.3 you'd have to be a believer that BSkyB will deliver. The thing is, they always have delivered -- in the long term at least. Eight and a half million customers is a remarkable achievement for a service that costs an average £34 per month.
More: Reaching For The Sky
