DVISOR. Media Sector: Best play for Elections. Investment Merits. Elections fuel growth. Higher Margins and Payouts. Aggressive multiples

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1 The DVISOR Media Sector June 27, 2012 Media Sector: Best play for Elections We initiate coverage of the Philippines Media Sector with a Buy rating as 2013 elections present opportunities for strong organic expansion. Our expectations is underpinned by increases in both advertising rates and minute load. We also expect margins to be sustained leading to impressive profitability which is attractive given the high dividend payout rates. Multiples are aggressive during elections and we think this is justifiable, we favor both ABS and GMA7. Investment Merits Source: Technistock Performance 1M 3M YTD ABS -0.57% -4.92% 17.17% GMA7 4.06% 12.25% 55.45% PSEI 5.44% 3.26% 18.81% Source: Technistock Gregg Adrian R. Ilag Equities Analyst AB Capital Securities, Inc. 14F Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines Tel.: Fax No.: abcsi@abcapitalonline.com.ph website: Elections fuel growth Past elections have enabled the Media companies to organically grow higher than the average. Growth was achieved through advertising rates(18% vs 6% mean) or minute load(16% vs 5% mean). There is a higher probability of advertising rates pushing growth due to limitation on loading minutes(61.40%; 7 year load factor mean) Higher Margins and Payouts GMA7 has impressive margins levels meanwhile ABS margins are moderate. We expect both companies to improve margins in FY 2013 driven mainly by lower cost of production (50% of revenues). GMA7 has low debt levels (20% D/A) enabling stronger margin expansion. We think that higher margins directly benefit investors given the high dividend yields (6.32%; 5 year mean) Aggressive multiples Media stocks tend to trade at higher multiples before elections(17.13% average premium). This is reflective of the impressive profit growth and dividend payout during election years. We set our target price at P12.87 for GMA7 and P37.08 for ABS based on a justified PE of 15.56x and 17.52x respectively. Investors may opt to wait for lower prices of ABS before buying, to have favorable risk reward levels. Media Industry Price Year to TEV/EBITDA P/E Div yield Company Name Rating Current Target Entry Upside Date 2012E 2013E 2012E 2013E 2012E 2013E ABS CBN Broadcast Corp Buy % 17.85% % 4.89% GMA Network Inc. Buy % 53.94% % 5.03% The information contained herein is based on sources which we believe are reliable, but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or solicitation of an offer to sell or buy the securities herein mentioned. This firm and its Directors and Officers and/ or members of their families may have a position in the securities herein mentioned and may make purchases and/or sales of the securities from time to time in the open-market and otherwise.

2 June 27, 2012 The DVISOR Page 2 Media Industry Ratings competition Source: Company Data; ABS, GMA7 Source: Company Data; ABS, GMA7 Companies use 3 types of media for advertisement spending, these are TV, radio and print. Advertisers have favored TV more than radio and print. TV accounts for approximately 77% of the media spending, while print and media take up 23%. There is roughly 85% TV penetration in the Philippines urban areas, TV penetration in Urban Luzon is 90%. Advertisers keep on watching the ratings of TV companies for optimal spending. Currently GMA7 uses AGB and Nielsen ratings for reference. Meanwhile, ABS uses TNS and Kantar Media. It may be difficult to judge market share based on ratings as AGB and Nielsen shows that GMA7 dominates audience share. Meanwhile, TNS and Kantar Media show that ABS has higher audience share than GMA7. Duopoly Dominance Source: Company Data; ABS, GMA7 We gauge market share in the TV media industry through total minute load. Currently ABS has been able to secure a larger share of loading minutes compared to GMA7. ABS and Studio 23 account for a combined market share of 35% meanwhile GMA7 and QTV have 33%. It is important to note that the GMA7 and ABS account for a very large share in the loading minutes implying that they have better chance of garnering more revenues from political spending

3 June 27, 2012 The DVISOR Page 3 Election effects Advertising Rate growth Estimated Rate/second 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % % GMA7 ABS Source:ABCSI Research Estimates Political spending is prevalent during elections as candidates post commercials on TV to sway voters. A significant jump in advertising rate is prevalent during elections as demand for minute load surges especially on prime time. The average growth of advertising rate/second is 5.49% in ABS and 7.17% in GMA7. Growth rates during elections are significantly higher than the average with GMA7 having 15% growth and ABS having 23% growth during 2007 elections. ABS expanded load factor in 2010 which prompted only a 5% increase in advertising rates. Sector Performance Source: Technistock Over the last 2010 elections, stock performance has shown that there tends to be an early discount for the election related spending, GMA7 and ABS outperformed the PSEI during the 3 quarters before 2010 election. During 2010 ABS was still able to continue out performance while GMA7 started to lag but was still in line with market performance. We think that ABS low liquidity enabled the stronger performance last 2010.

4 June 27, 2012 The DVISOR Page 4 Media Stocks GMA Network Inc. GMA Network Inc(PSE:GMA7) is a free to air broadcasting company engaged in TV and radio broadcasting. The company airs shows for domestic and international audiences as the firm generates majority of its revenues from advertising Financial Highlights E 2013E 2014E Revenue 11,500 12,015 11,157 9,845 12,458 11,771 Gross Profit 7,416 7,632 6,277 5,588 7,445 6,917 EBITDA 3,734 3,867 4,254 2,913 4,436 4,192 Profits 2,713 2,903 1,887 1,532 2,780 2,589 EPS We are projecting a 26.55% revenue growth in FY2013 underpinned by an increase in the estimated advertising rate of 20%(P2,460/second) and a load factor of 58%. We think that growth will be more anchored on the increase in advertising rate similar to 2007 and 2010 elections. We expect gross profit margins to settle at 57% in FY 2012 and 60% of FY2013, as we expect eventual decline in production costs given management efforts to cut down expenses. We expect profit margins to be 22% by 2013 given the low debt levels in conjunction with the higher revenues. GMA7 has been growing through advertising rate increases rather than increase in minute load. We assume that load factors on minutes do not go above 59% for the next 3 years. Furthermore, we expect a 58% load factor in conjunction with a 20% advertising rate growth during the 2013 elections.

5 June 27, 2012 The DVISOR Page 5 Valuation:GMA7 GMA7 Valuation 2012E 2013E Dividends PY recurring income Payout % 75.00% 90.00% Justified PE Equity valuation Assumptions Variable Amount Basis Growth 5.59% Dividend CAGR Cost of Equity 11.70% CAPM We valued GMA7 using a justified PE of 15.56x on the 2013 net income. Our assumption is premised by a payout level of 90% in FY2013. GMA7 has a mean dividend payout of 76% for the past 5 years with a high of 121% during 2010 elections. We estimate a 5.59% sustainable dividend growth rate which is derived from the dividend CAGR ( E), note that this is lower than the 16% historical dividend CAGR ( ). Valuation multiples of GMA7 are aggressive during elections. We think this is reflective of the strong margin structure of GMA7. The mean premium valuation from 2007 to present is only 3% however this goes to 18% during elections as investors aggressively buy shares. GMA7 s additional revenues from political advertisement get discounted by valuations as early as a year before actual election. GMA7 currently trades at high multiples compared to historical average as buyout speculations occur but we think this is sustainable and justifiable given the fundamentals.

6 June 27, 2012 The DVISOR Page 6 ABS-CBN Corporation. ABS CBN Corporation(PSE:ABS) is a multimedia conglomerate involved in television and radio broadcasting. ABS also airs TV shows and radio programs to capture audience share. Majority of ABS revenues come from advertisements. Financial Highlights (php mn) E 2013E Total Revenues 22,208 27,860 25,045 21,305 24,442 Gross Profit 10,521 14,831 10,499 8,308 9,732 EBITDA 4,907 7,307 4,008 6,072 7,122 Profits 1,147 2, ,620 2,062 EPS We are projecting a 14% revenue growth for FY 2013, this is under the assumption of an increase in advertising rate by 12% (P3,252/second) and a load factor of 63%. ABS may be able to grow more from increasing load factor than increasing rates similar to the growth during 2010 elections. We think this is due to the commendable prime time ratings of ABS. We estimate gross profit margins to bottom out at 39% in FY 2012 and then go higher to 39.81% by FY2013. We expect eventual decline in production costs as expense growth was an outlier in 2011(26% vs 12% mean). We expect profit margins to be 8.43% in 2013 in conjunction with the higher revenues.

7 June 27, 2012 The DVISOR Page 7 Unlike GMA7, ABS has been able to grow through both load factor and advertising rates. Load factors were 60% and 75% during 2007 and 2010 respectively load factor was significantly higher than the 61% average. During the year 2007, ABS had more growth from advertising rates, it grew 10.45% year on year significantly higher than the 6 year mean (3%) Valuation:ABS ABS Valuation 2012E 2013E Dividends 357 1,313 PY Recurring income 584 1,620 Payout % 61.20% 81.07% Justified PE Equity Valuation 7,723 36,114 Assumptions Variable Amount Basis Growth 8.00% Dividend CAGR Cost of Equtiy 12.76% CAPM We valued ABS using a justified PE of 17.52x on the 2013 net income. Our expectations is underpinned by payout levels amounting 81.07% in ABS has a mean dividend payout of 81% for the past 5 years with a high of 126% during 2010 elections. We assume a 8% sustainable dividend growth rate which is derived from the dividend CAGR ( E), note that this is lower than the 25% historical dividend CAGR ( ). Valuation multiples of ABS are also aggressive during elections. We think this is reflective of ABS commendable market share despite low margins. The average premium valuation from 2007 to present is only 2.52% however this goes to 18% during elections. ABS additional revenue from political advertisements are also discounted early by valuations.it was priced in as early as 3 quarters before actual elections. However, premium tend to have a shorter time frame for ABS as compared to GMA7.

8 June 27, 2012 The DVISOR Page 8 Condensed Financial Statements GMA7 ABS Income Statement Revenue 11,157 11,613 14,696 25,045 21,305 24,442 Gross Profit 6,277 5,588 7,445 10,499 8,308 9,732 EBITDA 2,913 2,718 4,436 4,008 6,072 7,122 EBIT 2,395 2,061 3,762 1,420 3,123 3,877 Recurring Profit 1,887 1,532 2, ,620 2,062 EPS Balance Sheet Cash 1,207 1,599 1,914 8,635 9,211 11,641 Receivables 4,191 3,844 4,946 8,128 6,914 7,932 Current Assets 6,850 6,793 8,238 18,490 17,838 21,302 PPE 3,253 3,298 3,327 15,242 17,383 17,206 Non Current Assets 5,531 5,576 5,605 26,317 28,458 28,281 Current Liabilities 1,895 1,637 1,710 10,519 7,451 8,352 Non Current Liabilities ,953 17,247 18,885 Equity 9,826 10,072 11,473 20,335 21,597 22,346 Cash Flows OCF before WC 2,204 1,017 2,178 6,398 4,392 5,129 Operating Cash flows 3,104 1,209 1,119 3,093 3,115 4,996 Investing Cash flows ,212-2,141-2,824 Financing Cash flows -2,