GMM Grammy

GMM Grammy Plc (GRAMMY)

Investment thesis: We expect weak bottom-lines for 4Q11 and 1Q12 and initial losses at new businesses. However, GRAMMY pays an acceptable dividend of 6-7%, so we maintain our HOLD rating. Of the Media stocks we cover, the firm will be one of the hardest hit by fallout from the flooding. Furthermore, given intensifying competition among cable and satellite TV operators, we are skeptical that GRAMMY’s 1-Sky satellite TV business will break even within 1.5 years (management guidance). Moreover, its launches of a new home shopping business and five more satellite TV channels will drag on the bottom-line for some time. We will revisit our model and rating when the earnings outlook starts to improve.
A further FY11 earnings cut: We now forecast a Bt10m net loss for 4Q11, which is much more bearish than our previous estimate (the number is based on updated management guidance). Physical music sales will post a decline for 4Q11, due to logistics problems, while five concerts and marketing events have been postponed to 1Q12. A GRAMMY movie called Top Secret screened in Oct and grossed only Bt40m. 4Q11 media ad revenues from all three channels—TV, satellite TV and radio—look set to plunge in tandem with spend by major advertisers. As such, we have cut our FY11 earnings forecast by another 13% to Bt593m. 
1-Sky to incur net losses for the next few years: Management has slashed its 4Q11 set-top box sales target (for its 1-Sky satellite TV platform) from 500K boxes to 144K, but maintains its FY12 sales target at 1.5m. We think the FY12 target is unrealistic, given the intense competition among cable and satellite TV operators (we also expect the margins of the pay-TV industry to deteriorate over the long-term). We anticipate 2-3 years of losses for the venture. Due to the inherent uncertainty surrounding forecasts for the satellite TV operation, we haven’t yet factored it into our projection.
Home shopping venture to start in June: Last month, GRAMMY set up a joint venture with CJ O Shopping Co Ltd, a South Korean company, to operate a home shopping business comprising diverse media channels, a distribution center and a call center. The venture will start operating in June 2012. Management guides that the new business will break even within the next 3-4 years.

Outlook
A further FY11 earnings projection cut: We now forecast a Bt10m net loss for 4Q11, against net profits of Bt189m for 4Q10 and Bt183m for 3Q11. The number also represents a precipitous downgrade from our earlier 4Q11 projection of Bt82m in net earnings. Fallout from the flooding is largely to blame. Physical music sales will post a decline, due to logistics problems, while five concerts and marketing events have been postponed to 1Q12. A GRAMMY movie called Top Secret screened in Oct and grossed only Bt40m. 4Q11 media ad revenues from all three channels—TV, satellite TV and radio—look set to plunge in tandem with spend by major advertisers. We don’t expect ad spend to normalize until 2Q11. As such, we have cut our FY11 earnings forecast by another 13% to Bt593m. We also anticipate a weaker YoY 1Q12 bottom line, due to reduced ad spend (but there should be a QoQ improvement).