Sport, Scale and Cash Flow

Research evidence excerpt

Sport, Scale and Cash Flow

Macquarie Equity Research Sky Network Television

Investment Thesis

We retain our Outperform rating on SKT. The investment case has changed materially: SKT

is transitioning from a legacy satellite TV operator into a scaled NZ video aggregator with

premium sport, streaming distribution, free-to-air reach, BVOD advertising inventory and

improving FCF conversion. The stock still appears priced as though satellite decline is the

dominant long-term variable. We think that is too narrow.

The market, in our view, under-recognises four sources of value:

1. the scarcity value of premium sport,

2. Sky Free advertising and BVOD optionality,

3. programming-cost discipline as entertainment spend becomes more data-led, and

4. a net cash balance sheet that provides capital-management optionality once

integration risk reduces.

The key investment question is whether management can convert premium sport, Sky Free

scale, streaming growth and lower entertainment-cost intensity into recurring FCF. We think

the answer is increasingly yes. FY27 should be the first cleaner test of the combined group,

with investors focused on Sky Free synergies, advertising momentum, programming costs,

Sky Box churn, Sky Sport Now growth, Neon stabilisation and capital management.

Valuation

Our NZ$3.90 target price supports an Outperform rating and implies a 12-month TSR of

26.2%, including dividends. The valuation is based on a DCF, cross-checked against dividend

yield, FCF yield and trading multiples. Our disclosed DCF valuation is NZ$4.50 per share. We

set our TP below DCF value to reflect execution risk around Sky Free integration, Neon churn

after the HBO exit and the timing of advertising recovery.

The stock looks inexpensive on both earnings and yield metrics.