VGI Global Media

VGI Global Media Plc (VGI) 

Investment thesis

Core profit below estimates 

VGI posted a 3Q14 (Oct-Dec 2014) net profit of Bt301m, down 5% YoY but up 14% QoQ. Stripping out Bt53m gain on the sale of an investment and non-recurring survey and business development expenses of Bt3m, core earnings would be Bt250m, down by 21% YoY and 6% QoQ. The bottom-line was 5% above our estimate and the consensus, due to the extra gain. But core earnings were 13% below our expectation and the street number because of weaker sales and heavier SG&A expenses than assumed. 

Results highlights

Sales slipped by 2% YoY and 1% QoQ to Bt789m. Strong growth in advertising receipts at the mass transit system (up by 12% YoY and 10% QoQ to Bt494m) and at office buildings and other media (up by 5% YoY and 14% QoQ to Bt47m) almost offset the effect of a dive in modern-trade media billings (down by 23% YoY and 19% QoQ to Bt247m). VGI’s revenue was weaker than industry-wide ad spending—transit media ad spending grew by 19% YoY and 18% QoQ, while in-store media ad spending rose by 4% YoY and 19% QoQ in the Oct-Dec quarter. 

GM declined to 53.5% in 3Q14 from 60.9% in 3Q13 and 54.6% in 2Q14, due to higher depreciation costs for digital media and lower revenue from modern-trade media. BTS-related GM declined to 75.3% from 82.4% in 3Q13 and 76.1% in 2Q14, while in-store media GM dropped to 7.5% from 29.5% in 3Q13 and 22.6% in 2Q14. Office building GM declined to 64.9% from 73.2% in 3Q13 (but increased from 56.6% in 2Q14). Also, the SG&A/sales ratio rose to 15.1% from 13.1% in 3Q13 and 14.4% in 2Q14, due to heavier sales promotions for modern-trade media. 

Outlook

VGI’s earnings are expected to increase YoY in 4Q14 (Jan-March 2015), driven by a broad recovery in ad spending—receipts from both the mass transit system and modern trade media. However, 4Q14 earnings will soften QoQ on seasonality.

What’s changed?

We have cut our FY14 core profit forecast by 9% to Bt989m and our FY14 net profit forecast by 5% to reflect: 1) lower revenue from modern-trade media and 2) the 3Q14 extra gain from the sale of an investment.

Recommendation

The persisting weak revenue recovery and the expiry of the Tesco Lotus sales floor contract (in Feb 2015)—which may prompt a consensus earnings forecast downgrade—limit the scope for share price upside, in our view. Moreover, VGI’s valuation is stretched at an FY15 PER of 42x against a peer mean of 25x.