MCOT

MCOT Plc

Investment thesis
We have cut our MCOT rating from HOLD to SELL, due to its weak viewership, lower expectations for its FY14-15 top-line and earnings with the consolidation of its digital TV licensing platform and its expensive valuation and unattractive yield—an FY14 PER of 24x and a 4% dividend yield for FY14. The consolidation of its two digital TV licenses has caused Bt7/share of net equity value erosion to MCOT. We expect the operation to remain weak in 3Q14, following its July programming revamp. The president resigned just before the coup and the CFO in the wake of the putsch; neither position has yet been filled. MCOT can’t be expected to recover till it has new leadership.
Earnings dive expected for 2Q14
Our 2Q14 net profit estimate is Bt170m, down by 62% YoY and 14% QoQ. The modeled YoY earnings plunge is due to sharply lower ad revenues (weak consumption and weak viewership ratings), reduced fees from govt special projects, a drop in concession revenue (due to True Visions’ subscriber migration from its MCOT concession to its NBTC-licensed subsidiary, which started in 1Q14) and heavier service costs (recognition of spectrum fee amortization expenses, starting April 25, 2014 when it took delivery of two digital licenses from the NBTC). Note that there was no discernable ad spend bump tied to the FIFA World Cup in May-June 2014.
All business units would have posted YoY revenue falls. We assume that TV ad revenue dived 25% YoY but rose 2% QoQ (Nielsen reported much shallower slippage of 6% YoY). The mean TV loading factor is modeled at 57% in 2Q14 (82% in 2Q13 and 55% in 1Q14). MCOT’s average audience share dropped to 7.1% in 2Q14 from 7.5% in 1Q14, due primarily to inferior TV programming.
Radio ad revenue probably fell 10% YoY (but increased 21% QoQ). We assume that concession revenue dived by 35% YoY and 4% QoQ. Our model factors in spectrum fee amortization of Bt48m for the two digital licenses in 2Q14 (MCOT paid Bt3.34bn for an HD variety channel and Bt660m for a kids channel).
Downgrades to FY14 top-line and earnings forecasts
We have cut our FY14 top-line projection by 16% to Bt4.8bn and our FY14 net profit forecast by 41% to Bt736m, due to diminished expectations for 1H14 revenue and the consolidation of the digital TV operation. Hence, our YE14 target price dives 30% to Bt20. We estimate Bt7/share of net equity value erosion with the advent of digital TV—the assumed value creation of Bt11/share from the two digital TV channels (Bt6.50/share for the HD variety channel and Bt4.50/share for the kids channel) is likely to be outweighed by Bt18/share of value erosion of its analog channel. Digital TV revenue won’t be significant until FY15 when Nielsen starts compiling ratings.