RS

RS Plc 

Investment thesis

We have a BUY rating on RS, premised on a solid outlook for its digital TV operation. Channel 8 (CH8) has proved sustained top-five viewership and a higher ad rate. The firm targets CH8 making the top-three of digital TV channels during this year. We have upgraded our FY15-28 net profit forecasts for the digital TV unit, mainly due to an expanded net margin assumption for CH8. Hence, our YE15 target price rises to Bt24 from Bt21.80.

4Q14 results recap—below our estimate

RS reported a 4Q14 net profit of Bt41m, down by 56% YoY and 84% QoQ. Earnings were 65% below our estimate, due to lower GM than assumed. GM was 25.4% in 4Q14 against 34.4% in 4Q13 and 46.2% in 3Q14. The YoY net profit drop was led by lower revenue from the music (down by 37% YoY and 19% QoQ) and showbiz (down 39% YoY but up 154% QoQ) units. The QoQ net profit dive was mainly due to the absence of World Cup compensation (it received Bt270m in 3Q14). Revenue from the media unit rose 12% YoY but plunged 33% QoQ. CH8’s receipts jumped 24% QoQ to Bt280m for the quarter.

Targets top-3 among commercial digital TV channels by year-end

On Feb 23, we arranged for a group of Thai institutional investors to meet with RS managers. The company remains confident in the outlook for CH8. RS targets a rating of over 0.60 (over 400k viewers/min) by YE15 (and a rating of 0.42 by June 2015), which would rank it third behind CH7 and CH3. It plans to broadcast Thai soap operas seven days/week (up from five days/week currently) and adding more variety shows. The firm guides that a major program revamp is scheduled for March 1, which it expects to increase CH8’s viewership to 300k/min (currently ~180k-200k/min).

Audience share rose to 3.96% for the channel in Jan from 3.31% in Dec. Its rating rose to 0.28 in Jan (~179k viewers/min) from 0.23 in Dec (~155k viewers/min)—fifth rank among all digital TV channels. Note that CH8 ranked fourth on Feb 19 with 0.28 (above MCOT’s 0.24). 

FY15 earnings forecast upgrade

We have upgraded our FY15 net profit forecast 10.3% to Bt576m, mainly due to an expanded net margin assumption for CH8 for this year—up from 10% to 15% (still more conservative than management, which guides for CH8 NM of 20%). We have also increased our mean net margin assumption for FY16-27 from 13% to 18%. As such, our DCF value for the digital TV business rises 19% to Bt17.5.

We now expect RS’s consolidated bottom-line to turn around to a net profit in 1Q15 against a net loss for 1Q14, led by revenue from CH8 and due to the low base set by 1Q14 (political turmoil and economic recession). 1Q15 earnings are also projected to rise QoQ, boosted by another FIFA World Cup compensation payment of Bt57m.