VGI Global Media

VGI Global Media
Investment thesis
We are now more bearish over VGI’s 1Q14 (April-June) earnings outlook.
Industry-wide ad spending remains weak—for the first time in many
years, there was no observable bump in spend tied to the FIFA World
Cup. We have cut our earnings forecasts by 13% for FY14 and by 3% for
FY15 to factor in diminished expectations for forward ad rates. However,
in order to reflect lower WACC as a result of loan draw-down during
1Q14, we have upped our end-March 2015 target price from Bt10.10 to
Bt10.80. Our SELL rating stands, due to VGI’s stretched valuation (an
FY14 PER of 48x against a peer mean of 28x).
Ad spending recovery yet to manifest—No FIFA effect
Industry-wide in-store media ad spending dived 45% YoY in April-June
and outdoor media softened 6%, while ad spend for transit inched up 3%,
according to Nielsen statistics. Spending among big-ticket buyers was
mixed—Unilever increased its spend 9% YoY during the quarter, while
the spends of P&G and L’oreal plunged by 59% and 23% YoY,
respectively. Our recent survey suggests no discernable surge in ad
spending during the FIFA World cup period. Ad receipts in June rose
slightly YoY, but not nearly enough to make up for the slump in April and
May.
1Q14 revisited; earnings estimate slashed 17%
Given the weak industry-wide number, we have slashed our 1Q14 net
profit estimate by 17% to Bt246m—a jump of 27% QoQ but down 20%
YoY. We now assume a slower ad receipt recovery for the quarter. Our
downsized sales estimate for the quarter is Bt773m (down 9% YoY)—
BTS billings of Bt440m (up 6% YoY), modern trade billings of Bt292m
(down 25% YoY) and other media billings of Bt41m (down 9% YoY). We
previously modeled for sales of Bt808m (down 4% YoY). GM probably
dropped 378 bps YoY but rose 211 bps QoQ to 53%, as we expect that
modern trade media GM was slim. The SG&A/sales ratio is estimated at
14%, up YoY but down QoQ.
Modest financial costs will be booked to the quarter tied to a Bt250m loan
draw-down, borrowed to help pay for the cash purchase of a 24% stake in
MACO for Bt662m.
Target price revised up to reflect lower WACC
We have cut our profit forecasts by 13% for FY14 and 3% for FY15 on
diminished expectations for ad rate rises (we now assume a flat mean ad
rate; we previously assumed a 5% rise). But we have increased our end-
March 2015 target price slightly from Bt10.10 to Bt10.80—the debt
increase brought on by loan draw-down during the quarter reduced the
weighted cost of capital to 10.1% from 10.6% (VGI was previously debtfree),
as the cost of the debt was only 5% versus a cost of equity of
10.6%.