WHY IS SKY SO PROFITABLE?

Table of Contents

Executive Summary Industry Overview

Broadband market overview Competitive Landscape

Company Considerations Headline operational metrics Financial Forecasts Financial metrics Share price performance Acquisition history

Trade Idea Appendix

Executive Summary Sky Plc, formerly known as BSkyB is a telecommunications company that provides television,

broadband internet services and fixed line telephone services in the UK

Skys previous profitability has been due to its increasing variety of products to its customer base

As a broadband services provider, Sky Plc. faces increased competition from similarly established companies, such as BT and Liberty Global, as well as new streaming platforms like Netflix. Its future profitability rests on its ability to continue expanding its customer base, maintaining current product offerings and diversifying product offerings. Sky Plc. has done this through:

Acquiring Sky Italia and Sky Deutschland to create a Sky Europe Gearing up for the Premier League auction in 2015 Introducing new streaming services such as NOW TV.

On a discounted cash flow basis, the company is intrinsically valued at 889p. Current Sky Plc. shares are trading on the London Stock Exchange at 916p per share

INDUSTRY OVERVIEW

Broadband Market Overview

Broadband Market Share

31.5%

22.8% 20.4%

18.5%

3.2% 3.5%

BT Sky Plc. Virgin Media Talk Talk Orange Others

Growth of broadband subscriber market

Over the past few years the broadband market has shown potential for companies in the telecommunications industry.

Sky Plc. remains a contender in the broadband market, but faces stiff competition from the likes of BT and Virgin Media

Competitive Landscape

Sky Broadband Sky Sport Sky TV

Netflix BT BT

Tiscali ITV Liberty Global

Vodafone ITV

BT

Telefonica

Liberty Global

Sky faces stiff competition from both its content and consumer businesses, but faces the most competition through its Sky Broadband, Sport and TV businesses.

COMPANY CONSIDERATIONS

Key Company Considerations Sky continues to report a strong financial performance

7.6bn in Revenue (2014 Annual report) 1.3bn in Operating profit (2014 Annual report) 60.0p earnings per share (2014 Annual report)

Numerous growth opportunities Successfully transitioned to a multi-product consumer strategy Introduction of NOW TV, Skys over-the-top streaming service Launch of Sky AdSmart, Skys targeted advertising business

Sky has successfully secured exclusive TV content through a number of strategic deals

Signed major new partnerships with HBO and ITV Renewed its multi-year movie agreement with Paramount pictures Signed 30 new sports rights agreements

Key Company Considerations

Sky will continue to face increased competition from modern streaming platforms like Netflix as traditional TV business stalls

Skys response to this is NOW TV, a low-cost set-top box and internet service that does not require a pay-tv subscription.

The realization of Sky Europe could offset the loss of UK subscribers Created following the successful acquisitions of Sky Italia and Sky Deutschland Provides a growth opportunity by selling more products to new customers (estimated at over 8

million subscribers)

Sky faces increased competition from BT to maintain its competitive edge in sports

BT competes with Sky for prime rights such as the Premier League and Champions League football.

Headline Operational Metrics Churn (3Yrs)

Product & Customer Growth

Churn measures the difference between customers who reinstated their contracts and customers who terminated their contracts

Customer subscriptions continue to increase

despite stiff competition in the broadband market

Sky has also increased its products offering each year, to maintains Skys value amongst its competitors

In 2013, Sky added 547,000 new customers and grew the products taken by 11% to 31.6 million

Financial Forecasts EBITDA & Margin (14-18)

EBIT & Margin (14-18)

Sales & Growth (14-18)

1.3 1.3 1.6 1.7

2.07 17%

12% 13% 13% 14%

0%

5%

10%

15%

20%

0

0.5

1

1.5

2

2.5

2014E 2015E 2016E 2017E 2018E

EBIT Margin (%)

1.67 1.98

2.42 2.53 2.92 21.9%

18.6% 19.1% 18.7%

20.3%

16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0%

0.00

1.00

2.00

3.00

4.00

2014E 2015E 2016E 2017E 2018E

EBITDA Margin (%)

The company is forecasted to grow its sales by y-o-y between 2014-2018 but growth will slow sharply, reflecting increased competition

Sales growth is expected to continue in light of

greater market penetration from recent acquisitions

Skys Operating Profit and EBITDA forecasts remain positive due to the companys established business model

7.617 10.663

12.709 13.539 14.417

5%

40%

19%

7% 6% 0%

10%

20%

30%

40%

50%

0

5

10

15

20

2014E 2015E 2016E 2017E 2018E

Sales Growth (%)

Key Financial Metrics - Gearing Net Debt / EBITDA

Debt / Equity

0.80x 0.12x

-0.64x -1.31x

-1.86x -2.42x

2013A 2014E 2015E 2016E 2017E 2018E

2.48x

1.32x 0.88x 0.65x 0.51x 0.41x

2013A 2014E 2015E 2016E 2017E 2018E

Skys falling Debt/Equity ratio forecast highlights the companys cash and equity based financing of recent acquisitions.

Sky is able to take on the additional debt burden to pursue further growth of the business if need be

1.22

6.41

-1.45 -0.65 -0.41 -0.33 2013A 2014E 2015E 2016E 2017E 2018E

Net Debt / (Cash) - $M

Share Price Performance vs. Competitors (Last 12 Months)

Acquisition History Since 2011, Sky Plc. has acquired 5 key businesses with a total cumulative deal

value of 7.3 bn

Skys strategy has been to focus on businesses which either increase its market share in existing businesses, or create opportunities in new markets

This has provided Sky Plc rapid cost savings and the addition of installed bases and channels which has created significant cross-selling opportunities

Announced Date Target Rationale Deal Value

Sky Plc. Acquisition History

January 2011 The Cloud To increase its mobile content portfolio 50 m

April 2013 O2 and Be Broadband

Leapfrog Virgin Media to become the second in the UK broadband market behind BT.

200 m

November 2014 Sky Italia and Sky Deutschland

Create Sky Europe 7 bn

TRADE IDEA

Valuation Commentary To evaluate the value of Sky Plcs shares, I have developed a 5-year discounted

cash flow forecast for FY14-18E, incorporating financial assumptions about the future profitability of the Sky Plc.

Key assumptions used include: - WACC: 8.7%

- Terminal growth rate: 3.0%

- Net Debt position: 1,392m

- No. of outstanding shares: 1,719m

Using DCF analysis, the shares are valued at 889p. Sky Plc. Shares are currently trading on the London Stock Exchange at 916p per share.

- This implies a 1.03x market premium to fundamental DCF value

Discounted Cash Flow Analysis

APPENDIX

Income Statement

Balance Sheet

Cash flow Statement

Financial Assumptions

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