Workpoint Entertainment

Workpoint Entertainment Plc (WORK) 

Below our estimate
WORK posted a Bt33m 1Q13 net profit, down by 56% YoY and 41% QoQ. It undershot our estimate by 57%. TV ad receipts were 2% below our model. TV service costs were 10% higher and SG&A 28% higher than assumed. GM was 41.6%; we had modeled for 48%.
Result highlights
The deterioration was due to a jump in OPEX, which more than offset the effect of a modest rise in TV ad revenue and the corporate tax cut. TV production costs rose 33% YoY, due to more in-house shows for both free TV and the firm’s satellite cahnnels, Workpoint TV. SG&A jumped 31% YoY on higher amortization expenses for new programs bought during 4Q12-1Q13 (which are amortized over a useful life of 2-5 years). New content for WORK’s planned digital TV channels will not be amortized until they are broadcast.
TV ad revenue (excl. satellite TV) grew only 3% YoY because the Feb-March program revamp caused advertisers to delay ad purchases, pending program ratings. Moreover, the full impact of the Jan ad rate increases wasn’t felt till March, as some client contracts didn’t expire till Feb or March. Satellite TV ad revenue was Bt39m, up 189% YoY, due to satellite ad rate increases. Events revenue plunged 85% YoY, as there were fewer events in 1Q13 and only one big event, Merchandise for the Flooded. In gross profit terms, TV grew 8% YoY. Satellite TV posted a Bt31m gross loss (against an Bt18m gross loss for 4Q12).
Outlook
Management confirmed that there won’t be any new content purchases in 2Q13. Hence, amortization costs should be stable QoQ. Ad revenue will rise QoQ on high season and higher ad revenues from new TV shows (some of which are sponsored) launched to replace old slots in 1Q13. Workpoint TV will post black ink in 2Q13, led by lower QoQ production costs and higher ad revenue. Bt180m in fee-based TV revenue sponsored by a govt agency will be booked in 2Q-4Q13. Three events—Thailand’s Got Talent, The Voice and a big-ticket govt project—will boost 2Q-4Q13 earnings.
What’s changed?
We have cut our FY13 net profit forecasts by 11% for FY13 and by 9% for FY14 to factor in greater amortization of new content purchases. Hence, our YE13 target price declines 7% to Bt58.
Recommendation
Our BUY rating stands, premised on value creation from a digital TV platform. The share price decline presents an opportunity to accumulate the stock ahead of the planned digital TV license auction in 2H13.