VGI Global Media

Below estimate 

VGI posted a 2Q14 (July-Sept) net profit of B264m, down 19% YoY but up 3% QoQ. Stripping out non-recurring survey and business development expenses of Bt2m, core earnings would be Bt266m, down 19% YoY and flat QoQ. The net profit was 7% below our estimate and 4% short of the street, due to weaker sales and heavier SG&A expenses than assumed. 

Results highlights

Sales slipped 7% YoY but rose 4% QoQ to Bt795m. Although industry-wide ad spending remained weak during the quarter (down 10% YoY and up just 2% QoQ), advertising receipts at the mass transit system rose by 4% YoY and 3% QoQ to Bt448m. In-store billings slumped 17% YoY but rose 6% QoQ to Bt305m. Revenue from advertising space in office buildings and other media dived 23% YoY but rose 2% QoQ to Bt43m. GM declined to 54.6% in 2Q14 from 59.7% in 2Q13 and 55.2% in 1Q14, due to higher depreciation costs for digital media.

BTS-related GM declined to 76.1% from 82.8% in 2Q13 and 79.1% in 1Q14, while in-store media GM slid to 22.6% from 30.8% in 2Q13 (but increased from 17.1% in 1Q14). Office building GM dropped to 56.6% from 70.9% in 2Q13 and 68.0% in 1Q14. In addition, the SG&A/sales ratio rose to 14.4% from 12.3% in 2Q13 and 13.8% in 1Q14, due to heavier personnel expenses. Moreover, financial costs rose YoY and QoQ because debt increased.

Outlook

VGI’s earnings are expected to expand both YoY and QoQ in 3Q14 (Oct-Dec), driven by high season. However, we do not expect a sharp rebound in ad receipts, as ad spending remains weak among the vendors of fast-moving consumer goods. As such, We don’t anticipate any ad rate rises during FY14, as occupancy rates remain low (especially for modern trade media). Hence, there is downside risk to both VGI’s FY14 top-line growth target range of 13-17% (our assumption is 9%) and to the street earnings forecast.

What’s changed?

Even though 1H14 net profit represents only 45% of our FY14 forecast of Bt1,172m, we maintain it unchanged, as there is normally a surge in ad receipts in the Oct-Dec quarter. We have rolled over our investment horizon to end-March 2016 with a new target price of Bt11.50.

Recommendation

The persisting weak ad spending recovery—which may prompt a consensus earnings forecast downgrade—severely limits the scope for share price upside, in our view. We expect FY14 core earnings growth of only 2%. Moreover, VGI’s valuation is stretched at an FY15 PER of 35x against a peer mean of 22x. Although news of a new acquisition might boost interest in the stock, the strike price for warrant conversion constitutes a brick wall against a share price run.