BEC World

BEC World Plc  

 

3Q15 is looking to be worse than we had earlier thought, still reeling from the slow economy that has slashed ad spending. We expect a 42% YoY and 16% QoQ plunge to Bt630mn, a low not seen since 2Q09. This would bring 9M15 to only 64% of our 2015F and we are cutting forecasts by 10% from 2015 onward; our TP also comes down to Bt38. Still, valuation is undemanding at its average PE and in view of the expected recovery next year we maintain our Buy call on the stock.   

 

Expect fall in 3Q15. BEC will again post poor earnings in 3Q15 at Bt630mn, down both YoY (-42%) and QoQ (-16%) – the 7th quarter of decline from 1Q14 and a low not seen since 2Q09. Earnings are being eroded by the slump in ad spending in response to the slow economy, tougher competition from newcomers (smaller digital TV operators) and the higher costs and amortization from operating three more channels. We expect ad revenue in 3Q15 to fall 12% YoY and 6% QoQ, in line with the reported drop in ad spending on TV by Nielsen. Production costs continue to head up as it is forced into producing higher quality programs to fight rivals – not just its traditional rival, Channel 7, but now also smaller new players (GRAMMY, WORK, RS, etc.). Hence, gross margin in 3Q15 is expected to contract to 32.3% from 35% in 2Q15 and 43.5% in 3Q14.   

Earnings downgrade. If 3Q15 earnings come out as anticipated, 9M15 will reach merely 64% of our full-year estimate. Since the economy shows no solid signs of returning to life in 4Q15, we are revising our forecasts down by 10% from 2015 onward to incorporate the slower ad revenue and slimmer gross margin. Behind the skinnier gross margin is the fact that most operating costs are fixed; thus lower revenue means a lower bottom line. After our revision, we expect earnings to plummet 40% in 2015 and not return to growth until 2016, at 15%, accelerating to 20% in 2017. This is backed by recovery in ad spending as the economy becomes more active next year. 

 

BEC still first in line for ad recovery. BEC in our view is first in line to get in on next year’s hoped-for improvement in ad spending despite its drop in ratings in September 2015. Our view is backed by several factors. First, BEC will continue to be the channel of choice for most viewers, with its ratings far above all other channels except Channel 7. When the economy starts to recover, advertisers will naturally put their budgets where they can get the most watchers. Second, the drop in ratings in September to 1.798 points from 2.153 points in July does not imply a permanent loss in audience. Historical data suggests that TV ratings may swing down for a few months and then regain momentum, usually having to do with the popularity of just one program, usually a soap opera. The swing does not affect short-term ad revenue as advertisers as a whole believe BEC is the strongest content provider and will come back or stay on.  

  

Maintain Buy with a new target price of Bt38 (down from Bt43), in response to the cut in forecast. Undemanding valuation coupled with earnings recovery next year keep us buyers of the stock.