New Offerings Have the Potential to Drive Revenue and Profit Growth for Sky TV

Sky Network Television, or Sky TV, is in an unassailable position of being the only pay-TV provider in New Zealand, with a subscription base of 856,000, translating to 50% of New Zealand households. We believe the company's dominance is unlikely to end anytime soon, allowing it to earn healthy returns on capital. That said, the Internet is becoming a viable option for distributing content to subscribers, which could open the market to a whole host of competitors. We maintain our wide Morningstar Economic Moat Rating on the company, but with a negative trend to reflect the threat of the Internet. We increase our fair value to NZD 6.50 per share from NZD 6.00 per share due to the additional cash generated since our last update. We also lift our fair value for the Australian listed shares to AUD 6.00 per share (from AUD 5.00 per share) to reflect the change in our New Zealand dollar fair value and the sharp appreciation of the New Zealand dollar against the Australian currency. We view the shares as modestly underpriced, with the growth outlook not fully reflected in the firm's current share price.