VGI Global Media

VGI Global Media Plc (VGI)

Investment thesis: We have initiated coverage on VGI with a BUY rating. Based on WACC of 11% and terminal growth of 3%, we derived a YE13 DCF target price of Bt50. That implies a one-year forward PER of 15.5x, still below the sector average of 17x. We like VGI’s fundamentals—the growth outlook is clear with superior ROE and a compelling yield. We have identified the following four major investment themes:
Theme 1—Fast revenue expansion: A lifestyle shift among Bangkokians to use public transport and shop at modern trade store rather than traditional retailers has led to greater segmentation of consumer markets. That segmentation has caused, ad spend to migrate to non-traditional advertising channels, particularly in-store media and transit media (VGI leads in both channels). Furthermore, ad rate increases and ad space expansion should make for a five-year top-line CAGR of 12.6%.
Theme 2—Fatter GM on new agreement with BTS: GM should jump to 51.6% in FY12 from 34.5% in FY11 and high GM is expected to remain above 50% for almost a decade, due to a contract signed with BTS on May 18, 2012. Previously, VGI shared 50% of advertising and rental income at BTS stations with BTSC. But the agreement was changed to a revenue-sharing regime of only 5% for five years, followed by a 5% rise every 5 years thereafter.
Theme 3—Strong financial position—net cash, high ROE: VGI’s operating cash flows are extraordinarily strong, as its business generates good profits on modest working capital requirements. We believe that equity financing this time around would be more than sufficient to cover VGI’s CAPEX plan and so maintain ROE of around 70%.
Theme 4—Yield defense: Low bond yields should boost VGI’s attractiveness. As the firm has only modest CAPEX plans for FY13 and majority shareholder BTS might require a higher DPS from its subsidiary, we think VGI may pay a dividend excess of its minimum payout policy of 50%. At a 90% payout ratio, the IPO price of Bt35 would imply a compelling yield of 8%. If we were to use the 5.6% mean dividend yield of selected Media stocks as a yardstick, the share price could rise to Bt55.
 
Outlook
Rapid earnings growth—a 5-year CAGR of 33%: (Note that VGI’s financial year runs April-March) Our VGI FY11-16 profit CAGR assumption is based on: 1) fast revenue expansion and 2) a much fatter GM. We expect an FY11-16 top-line CAGR of 12.6%, driven by ad spend migration to non-traditional advertising channels, the addition new BTS carriages in 2012 and next year, new contracts to manage advertising, retail space and radio media for leading hypermarket operators and other modern trade retailers and the likelihood of advertising rate increases. GM should jump by 17.1% YoY to 51.6% in FY12 and remain above 50% during FY13-20, due to the May 2012 agreement with BTS.

Fast revenue expansion
Increasing ad spend on transit and in-store channels: Greater segmentation of consumer markets has prompted advertisers to increase spend on non-traditional advertising channels—in-store, transit and internet—at the expense of print and radio. Ad spend on in-store and transit media rose from 1.5% of total ad spend in 2006 to 4.1% in 2011 (the story is even stronger in absolute terms because total ad spend expanded from Bt80bn in 2006 to Bt106bn last year). We expect transit and in-store media’s share of Thai ad spend to rise to 5.6% in 2014. Our Media analyst forecasts Thai ad spend growth of 5-6% in 2012 and 4-5% in 2013. We expect the proportion of ad spend allocated to transit and in-store media to outpace total ad spend growth. VGI currently estimates its market shares at 66% of in-store billings and 61% transit billings. As a substantial ensconced player, it should have an advantage over new market entrants.

Scope to increase BTS ad rates: The increasing number of viewers and periods of watching are the major drivers of VGI’s BTS digital media business. Our Transport analyst estimates that the number of skytrain passengers will grow at an FY11-16 CAGR of 13% in tandem with extensions to the BTS network and other mass transit routes that will feed the elevated light railway. Increasing ridership makes for a larger captive audience, which should translate into higher advertising rates. VGI believes that transit media is a great tool for tapping into mid-income demographics (high purchasing power). Advertising rates for transit media are much lower than for TV—for example, the rate for an in-train screen ad is 800,000 a month. The company typically increases advertising rates by 5-10% a year.

Ad space expansion—new bogies and upside from extension stations: BTS plans to increase the number of bogies (carriages) running on the Sukhumvit Line from 105 currently (35 trains, three bogies each) to 140 bogies (35 trains, four bogies each). The new bogies will go into service by the end of this year. As such, more advertising space will be available for sale—both in the inner carriage (LCD screens and posters) and on the outer carriage (train body wrap). Furthermore, BTS will take delivery of an additional five trains (comprising four bogies each) by YE13. Thus, the advertising space on trains will jump 36% in total. Moreover, there may be scope to increase ad space at six non-prime stations (Saphan Kwai, Sanampao, Ratchatewi, Prakanong, Thonglor and Ratchadamri)—VGI has yet to fully utilize the areas.
Apart from the 23 stations where the firm has sole rights to manage advertising space, it is also very well-placed to win contracts to manage ad space on five extension routes (the Green line, On Nut-Bearing). The Bangkok Metropolitan Administration (BMA) has already completed the Terms of Reference; VGI plans to soon submit a bid. It may be some time before it knows whether its tender is successful. VGI might also bid for other feeder routes that are currently in planning or under construction.

Margin expansion
New agreement with BTS makes for fatter GM: GM should jump by 17.1% YoY to 51.6% in FY12 and remain above 50% during FY13-20, due to a new agreement signed with BTS on May 18, 2012. Previously, VGI shared 50% of advertising and rental income at BTS stations with BSTC. But the agreement was changed to a revenue-sharing regime of only 5% for five years, followed by a 5% rise every 5 years thereafter (see Figure 6). Over the long-term, assuming that ad rates increase by only 3% annually and no additional bogies are added after 2013, we would estimate that FY17 GM would be around 51%, which would be an acceptable rate. However, we think ad rates should increase faster than 3% a year because of an expanding captive audience.

Balance sheet supports CAPEX
Strong financial position—net cash: VGI’s operating cash flows are extraordinarily strong, as its business generates good profits on modest working capital requirements. The firm’s cash collection period is shorter than its cash payment period and—because of the nature of its business—it carries no inventory, so the cash cycle was -39 days in 1Q12. However, in FY13 the company intends to build sets of platform screen doors (PSDs) for nine stations, which would require an investment of around Bt620m. It also plans to spend about Bt250m on software and digital screens and poster frames for the 35 new bogies. We believe that equity financing through the IPO of 26m shares will prove to be more than sufficient to cover VGI’s CAPEX plan. Moreover, its net-cash position would allow the firm to increase debt if an attractive investment opportunity were to present itself in the future.

Potential for a price surge, prompted by an attractive yield
Best dividend play—another choice for bond market migration: The surge in liquidity has prompted yield migration from the bond market to dividend stocks. We think VGI presents another option for fund managers seeking attractive yields. Also, the firm may pay out more than its stated policy of not less than 50% of net profit because it has only modest CAPEX plans for FY13 and its majority shareholder, BTS, might want a high payout. Moreover, VGI targets maintaining ROE of 70% (if the firm were to retain cash its ROE would drop). We, thus, assume a payout ratio of about 90%, which would translate into a dividend yield for FY13 of 8% (based on an IPO price of Bt 35). If we were to use the 5.6% mean dividend yield of selected media stocks (BEC, MAJOR, MCOT and WORK) as a yardstick, VGI’s stock price would have to rise to Bt55 for its dividend yield to decline to the same level as its peer average.

Recommendation and valuation
YE13 DCF derived target price of Bt50: We employed the discounted cash flow (DCF) method to determine VGI’s value. As its base business (advertising space on BTS stations and trains) generates recurring income, while its costs are mostly tied to concessions, its cash flows are fairly stable. We factored into our model the impact of rising service costs as a result of increasing revenue-sharing obligations to BTSC in May 2017 and depreciation costs for nine sets of platform screen doors (PSDs), bringing our DCF value to Bt50/share. Our target price implies a one-year forward PER of 15.5x, still discounted to other domestic media operators—BEC, MCOT, MAJOR, WORK GRAMMY—which trade at a mean PER of 17x.