The share price calculated for BskyB using the residual income valuation model is £ 3.72, which is £ 5.64 below the market share price of around £ 9.36. Reason for such depleted share price is that the profits reported by BskyB are not showing the impact of the equity capital and hence valuing the BskyB stock on the basis of reported profit for the period doesn’t show the true and fair view of BskyB share price. The price calculate by using the residual income valuation model is showing that how the cost of equity capital has affected the profits of BskyB and thus reporting a decreased value of the company and for the share price as well.
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Operating income predicted on the basis of the growth rate is showing a constant increase in the operating income in the future period. It is very important for BskyB to achieve a higher rate of growth in revenues which will ultimately gives rise to the need of investing in BskyB’s operating assets and thus both variables will end up with the increased value of company per share for the next period forecast. As the value of company is equal to the net present value of future cash flows discounted at appropriate rate of return to the investor. So the company should try focusing growth in its revenue rather than expending its business in the UK and around the globe.
Return on net operating assets of BskyB is also decreasing in the next three years period. The decrease is miner but this is a sign that BskyB could be in more depressed financial conditions if attention is not paid to the growth rate of revenue. As in the above graph the return on net operating assets has been dropped from 49.00% to 48.99%. As the investors are much interested in the future prospects of the company rather than the historical performance of company. At first instance the investor will forecast the value of its investment and if the investment is generating some additional amount on their investment and if investment is not generating any additional return on it then they will consider the alternative company to invest. Following would be the basic assumptions:
1- The stock price can be predicted by using the residual income valuation
model. 2- The relationship of current stock price and between the predicted share prices is significant. 3- Share piece of BskyB calculated using the residual income method divided by the current share price is more reliable and appropriate as compared to the book value of stock divided by the current value of stock. 4- The cost of capital will remain the same in the period under forecast which is 5.73%. 5- Terminal value will grow at the rate of industrial sector growth which is 4.00%. 6- Tax rate will not change.
7- Company will invest continuously in its operating assets. Investment recommendations:
1-As BskyB Vodafone are already partners, Vodafone has its customer base and the BskyB has the numerous type of entertainment and various license for the sports events. Recently the BskyB has announced that for the upcoming soccer league season the company has spent 299 million pound. If company sign a contract with Vodafone to show its direct broadcast to the Vodafone users than it will not only enhance the customer base of BskyB but will also promotes its sport broadcasting channels. (Thomson, 2014) Moreover, this could be more beneficial if the company also provides high speed broad band services to its Vodafone customer on a very cheap rate by introducing some attractive sport events covering packages.
As the company has a strong customer base of 4.9 million. This will certainly be increased by taking over this investment opportunity. Because the competitor there is capturing the market share very rapidly (British Telecommunications) and due to BT BskyB has lost 1.5 billion pound of its value in November. So it is much vital for BskyB to maximize the revenue by investing in secure opportunities. (PLUNKETT, 2014) 2- “British Sky Broadcasting Group Plc, known as BskyB, (BSYBY.PK,BSY.L), Friday said it agreed to invest $8 million in Luminari Capital, a venture capital fund focusing on technology and media startup companies that operate within the theme of innovation in video. This investment is expected to aid Sky to choose relevant startup companies to partner with in the future”. (British Sky To Invest $8 Mln In Luminari Capital – Quick Facts, 2013)
As the broadcasting industry needs continuously development and up gradation of its broadcasting technology and thus it will need investment to achieve that level of competitive broadcasting to compete within the industry and make keep its distinctive position in the UK broadcasting industry. Furthermore, UK film industry has also called for investment from BskyB of 20 million pound annually; this is major part of the annual investment in the UK film industry which signifies the position of BskyB in the UK broadcasting industry. (Macnab, 2014) As the strategy of BskyB has always remain customer focused and the company has always aimed high to serve its customer with its robust and highly innovative broadcasting technology, from a long period the company has reaped the fruits of its consumer focused strategies.
So again the company has the opportunity to gain several film licenses by dominating is position to generate considerable cash flows in future. Already the company is the choice of around 40% of the British household and such continuous significant investment opportunities can turn the ship of BskyB around the globe. 3-As the company is in the industry in which it is required to maintain a research and development for its broadcasting equipment. Currently the company pays a large portion of its earning to the supplier for the payment of equipment which it has purchased time to time. If the company invests in such a operating facility which is well equipped and has the capacity to produce the all tangible broadcasting equipment and as it will also have its R&D department then off course it can innovate its products in house and frequently.
This will also be considered as separate revenue generating business segment of BskyB which will ultimately increase the company’s potential to increase its revenue in upcoming periods. BskyB can also sell those in house broadcasting equipment to other organizations operating under the umbrella of the broadcasting. More over a company like BskyB must also consider the investing in the other competitors as it has already invested in many other media and broadcasting companies. this will help the company in a manner, if in a certain year the company remains unable to show increase in its revenue it will be compensated by earning revenue from its short term or long term investments.
Thomson, A. 2014. Vodafone Said to Discuss Sharing Broadband With BSkyB in U.K. [online] 20 January. Available at: http://www.bloomberg.com/news/2014-01-20/vodafone-said-to-discuss-sharing-broadband-with-bskyb-in-u-k-.html [Accessed: 31 March]. PLUNKETT, S. 2014.
Vodafone, BSkyB in talks to curb BT’s broadband reach – report. [online] 19 January. Available at: http://uk.reuters.com/article/2014/01/19/uk-vodafone-bskyb-idUKBREA0I09C20140119 [Accessed: 31 March 2014]. British Sky To Invest $8 Mln In Luminari Capital – Quick Facts. 2013. [online] 15 November. Available at: http://www.rttnews.com/2224924/british-sky-to-invest-8-mln-in-luminari-capital-quick-facts.aspx [Accessed: 31 March]. Macnab, G. 2014. UK panel urges broadcasters to invest. [online] 23 January. Available at: http://www.screendaily.com/news/uk-panel-urges-broadcasters-to-invest/5065719.article [Accessed: 31 March].