GMM Grammy

GMM Grammy Plc (GRAMMY)

Investment thesis
GRAMMY’s net losses going forward should be significantly shallower with the divestment of its loss-making pay-TV business. However, its recent share price rose more than 10% in anticipation of the deal, so has already priced in this good news, we believe. The stock trades at an expensive YE14 PBV of 4x (2SD above its long term mean of 2.2x). We maintain our HOLD rating with a new YE14 target price of Bt18.7, derived from a sum-of-the-parts methodology—recurring business (Bt11.9/share, pegged to a PBV of 2.2x) and the digital TV business (Bt6.8/share; DCF method).
Exiting the pay-TV subscription industry
GRAMMY will divest its wholly-owned subsidiary, GMM B (its satellited-platformed pay-TV business), to CTH Public Company Limited (CTH), a pay-TV operator controlled by Wichai Thongtang and the Vacharaphol family (the family owns Thai Rath newspaper). In exchange, it will receive a 10% stake in CTH. The accounting value of the deal is Bt1.03bn, but no money changed hands. Both GMM B and CTH posted deep losses for FY13. The transaction is expected to be completed by July 31, 2014. Note that GRAMMY will continue to run its set-top-box decoder sales business.
CTH’s takeover of GMM B will mean reduced costs as a merged operation and also reduced competition in the pay-TV market. For GRAMMY it will mean no more marking of GMM B losses into its income statement (given that its CTH stake is only 10%, it won’t mark equity losses if CTH continues to bleed red ink).
Revised FY14-15 forecasts to shallower net losses
GRAMMY’s pay-TV subscription business incurred a net loss of about Bt1bn in FY13. The divestment of GMM B will give some lift to the bottom-line. We now forcast GRAMMY’s net losses at Bt2.3bn for FY14 (shallower by 16.8% than our previous number) and Bt700m for FY15 (shallower by 56%). We expect its bottom-line to turn around to black ink in FY17—the terrestrial digital TV operation will post losses for FY14-16 (we forecast terrestrial digital TV business net losses of Bt820m for FY14 and Bt493m for FY15). 
2Q14 net loss expected to deepen 225% YoY
We now expect a Bt700m net loss for 2Q14, deeper by 225% YoY but shallower by 12% QoQ. The effects of unfavorable media and music industry dynamics were exacerbated by weak consumption spending and political chaos (hence, lower ad spend and lower showbiz revenue during the quarter). Moreover, we expect Bt300m in content amortization costs to be booked in 2Q14 for the pay-TV business. Net losses are expected to deepen in YoY terms in 2H14, mainly due to heavier OPEX tied to digital TV.