MCOT

MCOT Plc
Downgrade to SELL with mid-2014 TP at Bt33/share. MCOT is positioned to be
hurt by the consumption slowdown that has soured the ad industry and will lead to
budget cuts. MCOT itself is looking at an additional negative lying in street downgrades
as our new 2013 and 2014 estimates are 13% and 16%, respectively, lower than the
street. After Thailand enters the digital TV era in 2014, although MCOT, as a network
provider, will find security in revenue from network rental fees, we are concerned
about the initial cost for the three digital TV channels MCOT plans to bid for. Without a
positive catalyst and limited upside, we downgrade MCOT to SELL (from Neutral) with
mid-2014 TP at Bt33/share (from Bt43/share), based on 14x PE (historical average).
2013 revenue target of Bt6.5bn not achievable. At the analyst meeting on Friday,
MCOT revealed that it cut its 2013 revenue target to Bt6.2bn from Bt6.5bn in response
to the poor 9M13, particularly for TV advertising (major contributor at 64% of total
revenues in 9M13). The new target implies 4% revenue growth in 2013, less than half
the original target growth of 9%. 3Q13 TV advertising revenue grew 13% QoQ aided by
the new program schedule launched in July and more revenue from government
projects (~Bt250mn in 3Q13 vs. ~Bt170mn in 2Q13). However, on a YoY basis, 9M13 TV
advertising revenue growth was flat.
Lower cost pressure in 4Q13. There were non-recurring costs and expenses in 3Q13
that eroded margin. Cost of operations rose 16% both YoY and QoQ. Adding to the
greater cost from creating its own programs plus more lower-margin government
project revenues (~12% of total revenues in 2012 vs. 24% in 3Q13), MCOT had to bear
the cost of a special event, Thailand Broadcasting Exhibition 2013 (THAIBEX 2013). 3Q13
SG&A expenses surged by 20% YoY and 13% QoQ from setting aside Bt56mn provisions
for damages with regards to the case with Rai Som Co., Ltd. Without these nonrecurring
costs and expenses, MCOT expects lower cost pressure and better margin in
4Q13.
Bt2.2bn CAPEX in 2014. 2014 CAPEX is estimated at Bt2.2bn, supplied by internal cash
flow. Bt580mn will be spent on maintenance of an existing channel and Bt1.6bn to
invest in digital TV network infrastructure (multiplexer). This CAPEX excludes the cost of
the planned bid for three digital TV channels: children, SD variety and HD variety
channels.
Earnings cut. In view of the weaker-than-expected 3Q13 and concern about a
slowdown in the ad industry, we cut MCOT earnings by 10% in 2013 and 14% in 2014.
Our new earnings projection suggests that 4Q13 net profit will continue contracting
YoY, followed by unexciting 2014 earnings growth of 3% YoY. Our earnings projection
has not factored in earnings impact from digital TV network and channels.
Upside and risk. Upside is receipt of network fees, which we preliminarily estimate
will give 3-8% upside to our projection. Risks include ad revenue migration and cost
surge from new digital TV channels.