It is the beginning of a new year. Here in New Zealand an annual tradition is the media reporting of brokers views of the top stocks for the coming year. Here is one of the lists. We were not invited to participate this year - maybe next year. We decided to put out our list of our most undervalued and most overvalued NZX stocks - based on valuations done on the Valuecruncher blog. Unlike the lists in the media - our list includes our assumptions.

Valuecruncher Five Most Undervalued (Cheap)

1. Air New Zealand - +34.78%

2. Michael Hill - +31.34%

3. Sky TV - +31.22%

4. Nuplex - +26.19%

5. Rakon - +24.00%

Valuecruncher Five Most Overvalued (Expensive)

1. Mainfreight - -8.84%

2. Auckland International Airport - -7.65%

3. Fletcher Building - -7.29%

4. F&P Healthcare - -6.45%

5. Steel & Tube - -5.56%

Our valuations have been completed since early October 2008. The percentage over or under valuation was based on the share price at the time the valuation was completed. The Valuecruncher interactive model allows you to play with our assumptions. If you disagree with our analysis - change our assumptions and tell us what you think.

Comparing our list with the traditional brokers. Four of the six brokers list Sky TV - which is one of our picks as most undervalued. But also three of the six list F&P Healthcare - while we have it as one of our most overvalued.

We will revisit these valuations as the year progresses.

Disclosure: None

Sky Network Television ($SKT.NZ) is a provider of pay and free-to-air television services in New Zealand.  $SKT.NZ dominates in the New Zealand market.  $SKT.NZ had 720,000 subscribers at the end of 2007 in a country of 1.45 million households. $SKT.NZ is trading toward the bottom of their 52-week range.  How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $SKT.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$5.38 for $SKT.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 34.5% above the current share price of NZ$4.00.

Assumptions

• Revenue: Reuters aggregates seven analysts covering $SKT.NZ and the mean estimates of 2009 revenues are NZ$721.7 million. For our analysis we have used NZ$715.0 million in 2009, NZ$775.0 million in 2010 and NZ$835.0 million in 2011.
• Profitability: We have used a flat EBITDA margin of 40% to 2011. Reuters has $SKT.NZ‘s EBITD margin at 39.3% last year and an average of 42.4% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$115.0 million per annum moving forward.
• Discount Rate: 9.5%. The PwC New Zealand cost of capital report has $SKT.NZ at a WACC of 9.1% with the wider NZ market at 9.5%.
• Terminal Growth Rate: 4.0%.

Our analysis incorporates the cash and debt on the $SKT.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has placed a value of $5.74 per share of Sky TV, with a range of $4.40 to $7.21. The current share price of $5.91 falls marginally outside the mid-point valuation.

Revenue Growth

Revenue growth has been very stable over the past 3 financial periods (12.61%, 11.7%, and 11.5% in the 03/04, 04/05, and 05/06 periods, respectively). However, with Sky TV already present in 42% of households in New Zealand, we have forecasted growth to steadily decline from 11% in the 06/07 period to 9% in the 08/09 period, heading towards terminal growth of 3%.

EBIT Margin

EBIT margins have been rapidly increasing from a low of 7.3% in 2003 to 25.8% in 2006. We have forecasted EBIT margins of 30% for 2007, and 35% for 2008 and 2009 as there is no indication that EBIT growth will stop growing in the next few years. These high margins can be attributed to the continually increasing number of subscribers, but, perhaps more importantly, the decline in churn (the number of people that disconnect from the service). In 2006 churn was at an all time low of 13.6%, down from 15.8% in 2005.

Discount Rate (WACC)

The discount rate used in the analysis is 10% (Sky TV 2006 Annual Report calculates WACC at 9.7%).

Sky TV Valuation