Sky shares rise as RBC raises rating to 'outperform'

Shares in Sky rose on Tuesday as RBC Capital Markets lifted its rating on the stock to ‘outperform’ from ‘underperform’ and raised its target price to 1,100p from 1,000p.

“Our view reflects (1) the lower share price; (2) de-risking of rights renewal in Germany; (3) upside from mobile rollout,” RBC said.

“The rise in the price target is partly driven by our forecasts for higher outer year earnings in GBP terms from Germany and Italy.”

Sky last month paid €3.5bn to secure the lion’s share of TV rights to German Bundesliga football matches. Earlier in the year the company also signed an agreement with Telefonica UK to launch a mobile virtual network operator (MVNO) on its network.

Meanwhile, RBC said Sky could arguably afford to buy O2 following the failure of the Hutchinson takeover deal but does not believe it will do so.

“In our view, its optimal strategy is to roll out the MVNO, gaining scale quickly through bundled offers to the c.40% of UK homes that take Sky. Later on Sky could look to buy spectrum directly to reduce marginal cost.”

“Mobile through MVNO offers substantial revenue and cost synergies without the need to spend say c.£9.1bn buying O2 (6.5x EBITDA - a discount which we feel is justified given the blocked Hutch offer at 7.3x and lack of alternatives for the seller).”

Sky can cross-sell mobile and sim cards to its own customers at extremely low subscriber acquisition cost, RBC added.

The broker raised its revenue estimates by 5.2% in full year 2017 and 5.8% in 2018, partly driven by higher euro translation against the pound from the German and Italian businesses, which account for 30% of group revenue.

Shares rose 1.82% to 896p at 0956 BST.