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Table of Contents 1. Company Information: .......................................................................................................................... 3

2 Present Situations: ..................................................................................................................................... 5

2.1 Acquisition of O2: ............................................................................................................................ 5

2.2 Share Buyback: ................................................................................................................................ 5

2.3 Financial Results: ............................................................................................................................. 6

2.4 Revenue Growth Model: ................................................................................................................. 6

2.5 Balance Sheet: ................................................................................................................................. 8

2.6 Income Statement Analysis ........................................................................................................... 10

2.7Cash Flow Statement: .................................................................................................................... 12

2.8 Free Cash Flow Models: ................................................................................................................ 13

2.9 Key Performance Metric: .............................................................................................................. 14

3 Recommendation & Conclusion: ............................................................................................................. 15

3.1 Current Valuation .......................................................................................................................... 15

3.2 Technical Charts: ........................................................................................................................... 16

3.3 Conclusion: .................................................................................................................................... 17

4 Appendix .................................................................................................................................................. 18

4.1 Balance sheet estimation factors: ................................................................................................. 18

4.2 Income Statement estimation factors: ......................................................................................... 18

5. References: ............................................................................................................................................. 19

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1. Company Information:

British Sky group Plc is an integrated play in the media and entertainment space with operations

in the whole of United Kingdom and Ireland. The firm came into existence in 1990 when Sky

Television and British Satellite Broadcasting merged into a single entity. Today the company has

slowly transformed itself into a leader in the space of television and satellite entertainment and

pay services providing its services to more than 10 million homes in Ireland and United

Kingdom.

The firm provides television and broadcasting services through its bouquet of channel namely

Sky Sports, DTH, Sky Player and Sky Mobile TV.

The company has had a pretty significant 2013.From being just an entertainment and broad

casting play the company has beautifully scaled its way as a second largest broadband service

provider only second to British Telecom. The recent strategic acquisition of O2’s telephonic and

broadband services has provided enough room to diversify itself into the internet and broadband

market. Today British Sky group has 4.9 million subscribers in the telephony and broadband

services.

The financial KPIs also see a fresh impetus with ARPUs seeing a steady rise to 577 pounds. This

year the company has seen a rise of 547,000 new household customers and currently holds 40%

of the total share of household in UK.

Sports had continued to be its major earning generator. It has renewed its relationship with 6

major movie studios from Hollywood. The recent surveys showed the emergence of Sky Living

and Sky Atlantic as the top 5 pay TV channel. The emergence of its mobile telephony and

special download features through Sky Go has become an instant success. The features can be

used to access various value added services in mobiles as the company has aggressively tied up

and forged partnership with various telecom service providers. The users of value added services

are also seeing a rising trend and we expect the company to add a significant tally to its already

3.33 million existing customer base

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Unique 3 tier business model: The Company has a unique three tier business model that is very

robust and has ability to safeguard the portfolio from all possible strains.

Revenue sources through its various paid entertainment services. The major sources of earning in

this segment come from fees from subscription and advertisements. The company has a portfolio

of some of the most popular channels which have high TRP ratings and are good source of

advertisement revenue generator for the company.

They are:

Sky 1: It is the most popular family entertainment channel in UK which airs some of the most

popular shows like Simpsons, Got to Dance and so on.

Sky Living caters to female audience with tailor made shows like soap operas and dramas like

Elementary and Hannibal.

Sky Movies is a movie channel which airs Hollywood classics and all newly released movies.

The channel has a tie up with HBO, through which airs many of the shows of HBO.

Sky Sports is the most watched and viewed channel for sports lovers across United Kingdom.

The channel is an official partner of British Premier League and English Cricket and Football

team. This ensures a very high viewership and advertisement revenues for the group.

Revenue sources Retail subscription, data services, value added services and mobile services as

well as broadband services.

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2 Present Situations:

British Sky group Plc has been a stellar performer over the last few years and has been one of the

handful companies which had not been impacted much from the Subprime crisis of 2008.

2.1 Acquisition of O2:

The company has recently acquired a big chunk of O2’s data services which have dented their

financial position to a considerable extent. But we are very bullish regarding this acquisition.

This enables the group to further diversify its portfolio from being just a provider of regular

entertainment channels to step into the next generation data, telephony services, and broadband

and entertainment business for mobiles, tables and apps.

This will enable the company to add to the already existing 4.9 million subscribers in it

telephony, data and broadband services. The acquisition has been an all cash deal of 200 million

pounds and will definitely add a 5% rise in revenue with effect from 2014. We view this very

strategic move for the company as it opens up a new dimension to the next generation services

that Sky promotes through its flagship Sky Go and Now TV.

2013 has also seen the group investing more into its connected boxes which facilitates further

enhancement to the various value added services it wants to provide to its client.

2.2 Share Buyback:

Recently the group had announced its intent to buy 500 million pound worth of equity which is

another positive for the company. This clearly sends a message that the company is looking to

increase its promoter holding stake and that means management is confident about the upcoming

business environment in the media, entertainment and data communication space. This buys back

of shares Is EPS accretive in the overall Earning per Share calculation. The share buyback is

expected to get completed somewhere in 2014.

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2.3 Financial Results:

The company has posted a robust financial performance for 2013. The financial KPIs have seen a

fair uptick.

The Average Revenue per Unit has seen a 3% rise in 2013 from the last year and we view this as

a strong show from the company.

2.4 Revenue Growth Model:

As per our complex valuation metric we have a varied future projection growth for the period

2014 to 2007.

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On applying the complex logarithmic equation above, we come to a futuristic forecast for the

revenue for the company.

Year Exp Revenue Growth

in percentage

30-Jun-14 10.81

30-Jun-15 7.52

30-Jun-16 4.24

30-Jun-17 0.94

We expect 2014 to be a bumper year for the company as the FIFA World Cup is expected to

garner nearly 15% growth in advertisement revenues for the group. And with most of its

acquisition and capital expenditure already done in 2013, we expect the company to reap good

benefit as a result of this.

Our EPS estimates are projected in the table below.

2013 2014 2015 2016 2017

Operating

income

1291.0 1430.6 1538.1 1603.4 1618.4

EPS 0.6 0.8 0.9 0.7 0.8

Capital

expenditures

-454.0 -484.0 -515.9 -550.0 -586.3

P/E 14.4 14.5 13.3 12.2 13.1

y = -364.5ln(x) + 3861.7

-50

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50

100

150

200

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Revenue growth

Revenue growth

Log. (Revenue growth)

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2.5 Balance Sheet:

In millions of GBP (except for per share items)

Fiscal data as of Jun 30 2013 2011 2012 2013 2014E 2015E 2016E 2017E

Cash And Short Term

Investments 1351.0 1174.0 1410.0 1503.1 1602.3 1708.0 1820.7

Total Receivables, Net 353.0 327.0 282.0 300.6 320.5 341.6 364.1

Total Inventory 375.0 456.0 548.0 584.2 622.7 663.8 707.6

Prepaid expenses 239.0 294.0 309.0 329.4 351.1 374.3 399.0

Other current assets, total 11.0 24.0 20.0 21.3 22.7 24.2 25.8

Total current assets 2329.0 2275.0 2569.0 2738.6 2919.3 3112.0 3317.4

Property, plant & equipment,

net 896.0 948.0 1041.0 1109.7 1182.9 1261.0 1344.2

Goodwill, net 944.0 956.0 999.0 1064.9 1135.2 1210.1 1290.0

Intangibles, net 462.0 523.0 718.0 765.4 815.9 869.8 927.2

Long term investments 366.0 384.0 603.0 642.8 685.2 730.4 778.7

Note receivable - long term 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long term assets 288.0 407.0 377.0 401.9 428.4 456.7 486.8

Total assets 5354.0 5509.0 6345.0 6723.3 7167.0 7640.0 8144.3

LIABILITIES 0.0 0.0 0.0 0.0

Accounts payable 503.0 729.0 823.0 877.3 935.2 996.9 1062.7

Accrued expenses 799.0 760.0 828.0 882.6 940.9 1003.0 1069.2

Notes payable/short-term

debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current portion long-term

debt/capital leases 8.0 8.0 11.0 11.7 12.5 13.3 14.2

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(The explanations of our assumptions are pasted below in the appendix)

Other current liabilities, total 602.0 601.0 655.0 698.2 744.3 793.4 845.8

Total current liabilities 1912.0 2098.0 2317.0 2469.9 2632.9 2806.7 2992.0

Total long term debt 2325.0 2398.0 2909.0 3101.0 3305.7 3523.8 3756.4

Total debt 2333.0 2406.0 2920.0 3112.7 3318.2 3537.2 3770.6

Deferred income tax 0.0 1.0 1.0 1.0 1.0 1.0 1.0

Minority interest -- -- --

Other liabilities, total 82.0 68.0 106.0 113.0 120.5 128.4 136.9

Total liabilities 4319.0 4565.0 5333.0 5684.9 6060.1 6459.9 6886.2

SHAREHOLDERS

EQUITY 0.0

Common stock 876.0 837.0 797.0 797.0 797.0 797.0 797.0

Additional paid-in capital 1437.0 1437.0 1437.0 1437.0 1437.0 1437.0 1437.0

Retained earnings

(accumulated deficit) -1185.0 -1286.0 -1086.0 -1157.7

-

1234.1

-

1315.5

-

1315.5

Treasury stock - common -- -- --

Unrealized gain (loss) -- -- --

Other equity, total 14.0 68.0 11.0 11.0 11.0 11.0 11.0

Total equity 1035.0 944.0 1012.0 1038.4 1106.9 1180.1 1258.0

Total liabilities &

shareholders' equity 5354.0 5509.0 6345.0 6723.3 7167.0 7167.0 7167.0

Total common shares

outstanding 1753.0 1674.0 1594.0 1699.2 1699.2 1699.2 1699.2

Treasury shares - common

primary issue -- 0.0 0.0 0.0 0.0 0.0

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2.6 Income Statement Analysis

Fiscal data as of Jun 30

2013 2011 2012 2013 2014 2015 2016 2017

REVENUE AND

GROSS PROFIT

Total revenue 6597.0 6791.0 7235.0 8017.1 8620.0 8985.5 9069.9

OPERATING

EXPENSES

Cost of revenue total 3167.0 3369.0 3578.0 3964.8 4262.9 4443.7 4485.5

Selling, general and

admin. expenses, total 2331.0 2137.0 2366.0 2621.8 2818.9 2938.4 2966.1

Depreciation/amortization -- -- -- 0.0 0.0 0.0

Unusual expense(income) 26.0 42.0 -- 0.0 0.0 0.0

Other operating expenses,

total -- -- -- 0.0 0.0 0.0

Total operating expense 5524.0 5548.0 5944.0 6586.5 7081.9 7382.1 7451.5

Operating income 1073.0 1243.0 1291.0 1430.6 1538.1 1603.4 1618.4

Other, net -- -- --

INCOME TAXES,

MINORITY INTEREST

AND EXTRA ITEMS

Net income before taxes 1014.0 1189.0 1257.0 1287.5 1384.3 1443.0 1456.6

Provision for income

taxes 256.0 283.0 278.0 290.0 295.0 278.0 240.0

Net income after taxes 758.0 906.0 979.0 997.5 1089.3 1165.0 1216.6

Minority interest -- -- --

Total extraordinary items 52.0 0.0 --

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Net income 810.0 906.0 979.0 1222.7 1383.9 1072.6 499.7

Inc.avail. to common

excl. extra. Items 758.0 906.0 979.0 1222.7 1383.9 1072.6 499.7

Inc.avail. to common

incl. extra. Items 810.0 906.0 979.0 1222.7 1383.9 1072.6 499.7

EPS

RECONCILIATION

Basic/primary weighted

average shares 1743.0 1721.0 1614.0 1614.0 1614.0 1614.0 1614.0

EPS 0.5 0.5 0.6 0.8 0.9 0.7 0.8

COMMON STOCK

DIVIDENDS

DPS - common stock

primary issue 0.2 0.3 0.3 0.3 0.3 0.3 0.3

Gross dividend - common

stock 405.0 422.0 475.0 475.0 475.0 475.0 475.0

Interest expense,

supplemental 129.0 130.0 131.0 131.0 131.0 131.0 131.0

SUPPLEMENTAL

INCOME

Depreciation,

supplemental 179.0 179.0 176.0 176.0 176.0 176.0 176.0

Total special items 26.0 39.0 -1.0 0.0 0.0 0.0 0.0

739.2 770.8 781.9 782.3 782.3 782.3 782.3

NORMALIZED

INCOME

Normalized income

before taxes 1073.0 1243.0 1291.0 1430.6 1538.1 1603.4 1618.4

Effect of special items on

income taxes 6.6 9.3 -0.2 0.0 0.0 0.0 0.0

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Income tax excluding

impact of special items 263.0 292.0 278.0 290.0 295.0 278.0 240.0

Normalized income after

tax 777.0 936.0 978.0 1140.6 1243.1 1325.4 1378.4

PAT 777.0 936.0 978.0 1140.6 1243.1 1325.4 1378.4

Basic normalized EPS 0.4 0.5 0.6 0.7 0.8 0.8 0.9

2.7Cash Flow Statement:

OPERATIONS 2011 2012 2013 2014E 2015 2016 2017

Net income 1014.0 1189.0 1257.0 1340.0 1428.4 1522.7 1623.2

Depreciation/depletion 173.0 179.0 176.0 187.6 200.0 213.2 227.3

Non-Cash items 197.0 120.0 114.0 121.5 129.5 138.1 147.2

Cash taxes paid,

supplemental 219.0 254.0 300.0 319.8 340.9 363.4 387.4

Cash interest paid,

supplemental 124.0 125.0 128.0 136.4 145.5 155.1 165.3

Changes in working

capital -117.0 -153.0 -143.0 -152.4 -162.5 -173.2 -184.7

Total cash from operations 1426.0 1500.0 1606.0 1712.0 1825.0 1945.4 2073.8

INVESTING

Capital expenditures -423.0 -457.0 -454.0 -484.0 -515.9 -550.0 -586.3

Other investing and cash

flow items, total -195.0 -267.0 -48.0 48.0 51.2 54.5 58.1

Total cash from investing -618.0 -724.0 -502.0 -436.0 -464.7 -495.4 -528.1

FINANCING

Financing cash flow items -124.0 -125.0 -128.0 -128.0 -128.0 -128.0 -128.0

Total cash dividends paid -353.0 -410.0 -441.0 -470.1 -501.1 -534.2 -569.5

Issuance (retirement) of -58.0 -697.0 -681.0 -681.0 -681.0 -681.0 -681.0

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stock, net

Issuance (retirement) of

debt, net -1.0 -1.0 497.0 497.0 497.0 497.0 497.0

Total cash from financing -536.0 -1233.0 -753.0 -782.1 -813.1 -846.2 -881.5

NET CHANGE IN CASH

Foreign exchange effects -- -- --

Net change in cash 272.0 -457.0 351.0 493.9 547.1 603.8 664.3

Net cash-begin

balance/reserved for future

use

649.0 921.0 464.0 815.0 1308.9 1856.0 2459.9

Net cash-end

balance/reserved for future

use

921.0 464.0 815.0 1308.9 1856.0 2459.9 3124.1

SUPPLEMENTAL

INCOME

Depreciation,

supplemental 173.0 179.0 176.0 187.6 200.0 213.2 227.3

Cash interest paid,

supplemental 124.0 125.0 128.0 136.4 145.5 155.1 165.3

Cash taxes paid,

supplemental 219.0 254.0 300.0 319.8 340.9 363.4 387.4

2.8 Free Cash Flow Models:

As per the latest free cash flow model we have the following projected cash flow per share:

2013 2014 2015 2016 2017

EBIT 1291.00 1430.56 1538.13 1603.35 1618.42

Depreciation 176.00 187.62 200.00 213.20 227.27

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Cap Ex -454.00 -483.96 -515.91 -549.96 -586.25

Current Asset 2569.00 3148.21 3237.23 3282.60 3276.44

Current Liability 2317.00 2469.92 2632.94 2806.71 2991.95

WC 252.00 678.29 604.29 475.88 284.49

FCFE 373.70 26.75 156.50 309.71 489.43

Equity base 1614.00 1614.00 1614.00 1614.00 1614.00

Free Cash flow per

share 0.23 0.02 0.10 0.19 0.30

2.9 Key Performance Metric:

2013 2014 2015 2016 2017

Company Book Value 1012.00 1038.35 1106.95 1180.07 1258.02

EBIDTA 1291.00 1430.56 1538.13 1603.35 1618.42

Sales 7235.00 8017.10 8619.99 8985.48 9069.94

BV/EBITA 0.78 0.73 0.72 0.74 0.78

BV/SALES 0.14 0.13 0.13 0.13 0.14

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3 Recommendation & Conclusion:

From all the financials above we see the company has a few things going for it:

A) Diversification of business into data services, broadband and telephony

B) No major capital expenditure plans in the next few years.

C) The company has a steady operating model and its core business area is fairly secured in

terms of consistent realizations.

D) 2014 is going to be a bumper year for Sky Sports as lot of big time sporting activities like

World Cup are lined up. This will definitely lead to a 15% upside in advertisement

revenue which will translate into a 3% uptick in revenue.

So if we extend the idea forward we can say that the EPS estimate of 80 for 2014 will jump to

104 in 2014. (We have not added this into our estimated projection model).

3.1 Current Valuation

Currently the stock trades at 940 Pounds which is nearly 12 time trailing FY 14 earnings

estimates and 10 times FY 15 estimates.

So in terms of valuation the stock is neither cheap nor too expensive.

Historically the stock trades at 13 times, 1 year forward earning. So going by that consensus the

stock has an upside potential of 1170.

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Therefore we view the upside target of the stock at 1170 pounds which is 17% from current

level. However the downside too is limited and we expect the stock to find buying interest

around 900 odd levels.

3.2 Technical Charts:

Technically the stock looks to have solid support at 900 odd levels. An upside resistance stands

at 1000 levels. So price action tells us that a correction in the stock to 900 levels is a good time to

buy.

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3.3 Conclusion:

We are overweight on the stock with an upside target of 1170 and downside support at 900.

As per dividend history the stock provides a yearly dividend of 3%. So adding that into

perspective an investor can buy it at current level for an overall return of 20%.

Summary:

Rating: Overweight

Recommendation: Buy

Target: 1170

Buy: At current levels

Downside: Limited to 900

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4 Appendix

Financials.xlsx

4.1 Balance sheet estimation factors:

While preparing the balance sheet for future years we have made few assumptions:

We have considered the fact that most of the capital expansion for the company is done in 2013

and we expect the company to consolidate its position going forward.

Applying our future projection model which is in sheet 2 we have obtained the yearly growth

rate for the company by applying the geometric mean method. We are taking the yearly growth

rate at 6.6%

Applying linear growth model we see the projections coming out on the higher side so we reject

it and take a standard growth of 6.6%.

4.2 Income Statement estimation factors:

The growth model applied for income statement goes like this: We have taken the growth for

each year based on a logarithmic equation from our calculation sheet.

We have taken the growth for 2014, 2015, 2016 and 2017 as 10.81%, 7.52%, 4.24%, and 0.94%

19

5. References:

Clemens, E. (1951). “Price Discrimination and the Multi-product Firm”, Review of Economic

Studies, Vol. XIX: pp 1- 11.

Coase, R. (1960). “The Problem of Social Cost,” Journal of Law and Economics, Vol. 3: pp 1-44

Danzon, P. Towse, A. (2003) “Differential Pricing for Stocks: Reconciling Access, R&D and

Patents”, International Journal Finance and Economics, Volume 3(3), Pages 183-202

Finn, M., Elliot-White, M. and Walton, M. (2000) Tourism and Leisure Research Methods: Data

collection, analysis and interpretation. Harlow: Pearson Education.Chapter 1.

Gill, J. and Johnson, P. (1991) Research Methods for Managers. London: Paul

Chapman.Chapters 1 and 3.

Harrel, G.D and Frazier G.L. (1999). Marketing: Connecting with customers. Upper Saddle

River.

Investor Information available at:

http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=BSY:LSE

Investor Information available at:

http://quotes.morningstar.com/stock/s?t=BSYBY&region=usa&culture=en-

&ownerCountry=USA

Investor Information available at: http://www.telegraph.co.uk/finance/newsbysector/epic/bsy/

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