BEC World

BEC World: Hold; Bt36.50
Price Target : Bt36.25 (Prev: Bt42.00); BEC TB

3Q11 net profit of Bt984m (+10%, -3.5%) was 6% below our and consensus estimates due to higher programming costs

Earnings should be weak in 4Q11F and 1Q12F due to ad spending contraction following the floods

No re-rating catalysts; downgrade BEC to HOLD with a revised target price of Bt36.25

BEC’s advertising income grew 8.7% YoY in Oct11, but is likely to drop by 20-30% YoY in Nov-Dec because of the floods.

Impact alleviated by program reshuffle. BEC made a strategic move in early November to halve its early primetime drama airtime to 45 minutes and super primetime drama to 1:45 minutes from 2:15 hours, and extended airtime for its popular news programs. It focused on delivering better coverage of the flood situation, which drew more interest. By doing this, BEC will see lower ad income as ad rates for dramas are higher than for news. But then, advertisers had been cutting ad spending already because of the floods. Additionally, BEC’s costs would drop because news (mostly fixed costs) cost less to produce than dramas (mostly variable costs). BEC will monitor ad bookings closely and would review its programmes weekly until things start returning to normal.

Earnings expected to recover from 2Q12F onwards. Given its popular programs and quality management, BEC’s profitability should recover before peers. We expect the recovery, estimated from 2Q12F onwards to be driven by improving ad income and lower tax rates.

Recommendation

Downgrade to HOLD. Premised on weak advertising in this and next quarter, we cut earnings by 12.6% for FY11F and 11.6% for FY12F, and target price from Bt42 to Bt36.25, pegged to 19.5x FY12F PE. We like BEC’s business model and quality management, but the absence of near term catalysts and limited upside prompted us to downgrade BEC to HOLD from Buy.