Time to tune into Sky's prospects

Log on to ebookers while it still looks cheap; Time to put slimmed down Uniq out to pasture

Stephen Foley
Tuesday 12 November 2002 01:00

BSkyB's ferociously aggressive satellite TV operation has received many brickbats in its time but it is hard not to admire its achievements. Last week the company's first-quarter results showed the enormous progress it has made since deciding to risk £2bn on upgrading to digital technology.

Sky reported the highest rate of quarterly subscriber acquisition for nine years and direct subscribers now stand at 6.3 million. The current financial year will produce the first pre-tax profit for years: £90m, according to Investec Securities, which reckons it will jump to £398m in 2003-04 and £728m in 2004-05. That's some upside.

The best thing about Sky is its defensive quality, with most of its £3bn annual revenues coming from subscribers paying by direct debit. The rest of the media industry is struggling with a slowdown in advertising revenues. Sky is so confident of customer retention that it is pushing through its third annual price rise in a row.

Sky now occupies a quasi-monopolistic position, with one of its rivals, ITV Digital, having gone bust, and with the other two, cable companies NTL and Telewest, in deep financial crisis. The only negative now is an Office of Fair Trading inquiry into the pricing of Sky channels sold to other operators, but wholesaling content is not a major part of Sky's revenue.

From 2005, when a lot of content deals come up for renegotiation, programming costs are expected to come down sharply – most notably the cost of Premiership football rights.

Sky yesterday issued 43 million shares to three former business partners, including BT, and these were immediately sold in the market. That cleared a stock overhang that has threatened to depress the share price.

The stock closed down 12.5p to 572p. Before goodwill, that puts shares on a forward multiple of 75 times this year, falling sharply to 30 time next year. Most analysts value the company on the basis of cash flows further into the future. Because Sky is a cash cow waiting to be milked, investors should buy in.

Log on to ebookers while it still looks cheap

With the likes of easyJet and Ryanair noisily advertising the virtues of buying airline tickets online, ebookers has to do little but sit back and count the money as increasing numbers of people find its website a useful way to buy longer-haul flights. Sales in July, August and September were £78m, up 58 per cent on last year, and all the growth was organic.

Unlike some of the dot.com cash burners, ebookers has kept a tight reign on costs and even does most of its processing out in India, where the labour is cheaper.

The move into higher-margin sales of hire car and hotel deals is also benefiting the company and its founder, Dinesh Dhamija, says it could buy other bricks-and-mortar specialists in these areas, moving their booking systems and customers online.

Ebookers has now turned earnings positive, before tax, interest and write-downs, and should start making post-tax earnings by mid-2003.

Having earnings will mean investors can subject the company to a traditional valuation by a price-earnings multiple. That transition can be a turbulent one, and there is no harm locking in recent profits. But ebookers still looks very cheap on a multiple of sales. With growth continuing and costs cut to the bone, maintaining a decent profit margin shouldn't be a problem. Buy.

Time to put slimmed down Uniq out to pasture

Shareholders in the old Unigate Dairies have seen their company whittled away by a combination of tough trading conditions and poor management. It has sold its milk business and its pig-meat division, spun off the Wincanton deliveries business, and also sold its St Ivel spreads and yogurts units. So what is left, and is it any good?

Not much, and not really. The company is concentrating on own-brand convenience foods, making the pre-packed salads sold in Costa coffee shops, sandwiches for M&S, ready meals for Sainsbury's and trifles for Asda. It's a very competitive industry and Uniq will struggle to make headway.

Uniq will have to boost advertising to encourage the convenience food habit among Continental Europeans, just at a time when increased pension contributions and factory upgrades are also needed.

New management under Bill Ronald, ex of Mars, is putting a lot of effort into the nitty-gritty of new product development and improving margins by centralising the purchase of ingredients. But results, on the evidence of yesterday's interim figures, are only patchy. The company's sales grew a limp 3 per cent to £446.2m in the six months to 28 September, and even that was mostly down to the strength of the euro. A pre-tax profit of £13.3m compared with a loss of £28.2m last time.

The manufacture of convenience foods is low-margin, labour intensive stuff and Uniq is not even aiming to have sales growth to match its industry rivals. It's all about as appetising as a two-day old prawn sandwich. Avoid.

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