Share swap positive for GMM: Fitch Ratings
Fitch Ratings (Thailand) has revised the rating outlook for GMM Grammy from stable to positive, following the company's share swap with CTH.
"The positive outlook reflects GMM’s lower exposure to execution risk of the pay TV business following the transaction and an improved financial profile, once the pay TV business is deconsolidated," the rating agency said.
The offloading of GMM's loss-making pay TV business is positive to its credit profile, Fitch added.
GMM’s pay TV business will be integrated with CTH’s pay TV operation, in which GMM will own 10 per cent. The transaction will result in the deconsolidation of pay TV operations from GMM’s financial statements.
Fitch noted that the transaction will reduce GMM’s exposure to execution risks in the pay–TV business, and allow the company to focus financial and management resources on its new digital TV business.
It expects GMM’s earnings and cash flow to improve in 2015 due to a reduction in pay TV-related costs, including cash operating cost (Bt700-Bt800 million) and capital expenditure for content acquisition (Bt600 million-Bt1 billion).
This will be more than enough to offset the subscription revenue foregone worth Bt1-Bt1.2 billion, it said.
It foresees that digital TV is likely to be a key growth driver for GMM in the medium term. The company launched digital TV channels in May 2014, after it won the bidding for two licences in December 2013. The company aims to move most of its content from satellite TV channels to the new digital TV platform, while gradually adding new programmes to the new digital TV platform to be in line with the expected advertising revenue growth. The likely higher advertising rates for digital free TV due to wider viewer coverage than that of satellite TV should boost the group's revenue in the medium term. However, the size and presence of a number of new operators in the digital TV market may lead to higher price competition than expected.
Fitch noted that low earnings from the digital TV business will put pressure on GMM’s profit margin in 2014. Nonetheless, the profit margin is likely to improve in 2015 and 2016 as revenues from digital TV increases. With the operating costs of this business largely fixed, a large proportion of any increase in revenue translates into profit.
Due to large investment in digital TV, GMM should maintain negative free cash flow for at least two years.
