Berenberg highlights Sky risks

Analysts at Berenberg have cut their earnings-per-share estimates for Sky and have highlighted concerns about the uncertain outcome of the forthcoming auction of Premier League rights.

Berenberg’s analysts cut their EPS estimates for the broadcaster on the ground that it will incur unforeseen investments related to its loss-making mobile offering, increased investment costs in content in the UK and Germany and higher marketing costs for Sky Pro and Sky Q, along with the new OTT service in Spain.

Berenberg analysts Sarah Simon, Alastair Reid and Robert Berg cut their estimate for 2018 EPS by 8% and 2019 by 11%.

The analysts also highlighted the likelihood of higher Premier League costs and the uncertainty surrounding the forthcoming auction of Premier league rights thanks to the interest of US online giants such as Amazon and Facebook.

Berenberg’s analysts highlighted the 36% increase in the cost of English Football League rights, recently won by Sky, and said this was consistent with its expectation of Premier League cost inflation in the region of 35%. Despite this, Premier League rights remain crucial for the pay TV outfit.

“Were Sky to lose any more packages, this could undermine its appeal to pay TV customers,” they said.

In addition to the higher costs identified by the analysts, they identified factors that are likely to negatively impact the pay TV operator’s cashflow next year, including a likely reduction in working capital, the need for a down-payment on new Premier League rights, costs associated with the sale of handsets and the use of short-term provisions.

Among the negative factors having an impact on Sky, Berenberg said that the decision by UK culture secretary Karen Bradley to refer 21st Century Fox’s bid on both competition and broadcasting standards grounds mean that “he risk associated with the transaction is rising, as reflected in the share price movement”.

The analysts said that the higher marketing costs associated with Sky Pro and Sky Q were being capitalised but would result in steadily increasing depreciation charges.

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