VGI Global Media

Investment thesis

At the analyst meeting, management played down the FY14 outlook and admitted the possibility of losing Tesco-Lotus sales floor area. Even though VGI is likely to get additional non-sales floor area from Tesco-Lotus and new ad space elsewhere, we think the net impact will be negative. We have, therefore, cut our profit forecasts by 8% to Bt1,082m for FY14 and by 14% to Bt1,372m for FY15. Hence, our end-March 2016 target price is trimmed to Bt11 (from Bt11.50). 

A lower sales growth target and the likelihood of a street profit forecast downgrade severely limits the scope for future share price upside, in our view. Moreover, VGI’s valuation is stretched—an FY15 PER of 37x against a peer mean of 23x.

QoQ earnings growth expected for 3Q14 (Oct-Dec)  

As the Oct-Dec quarter is normally a period of seasonally heavy ad spend, VGI’s earnings are expected to rise QoQ in 3Q14 (Oct-Dec). The occupancy rates of all media categories are expected to increase QoQ in the quarter. We also expect the firm’s blended GM to fatten QoQ in tandem with higher sales. However, VGI’s 3Q14 earnings will probably fall YoY, due mainly to a YoY slump in in-store media ad receipts.  

Weak ad spend prompts cut to FY14 sales growth guidance

The April-Sept 2014 top-line slipped 8% YoY, squeezed by lower revenue at modern trade and office building media. Ad spend is likely to remain weak throughout 2014. Note that VGI has slashed its FY14 sales growth target range from 13-17% to 0-3%, which implies significant downside risk to the consensus FY14 earnings forecast, as the street currently assumes 12% sales growth for the year.

Risk of losing Tesco-Lotus sales floor area intensifies, but… 

There is a possibility that Tesco-Lotus will not renew the contract for sales floor area with VGI when it expires in February 2015, as Tesco-Lotus plans to assign a subsidiary to manage sales floor area. However, VGI says it is negotiating with Tesco-Lotus to manage additional non-sales floor area, which it believes would mitigate the revenue loss effect.

…new advertising space elsewhere  

VGI recently signed a three-year contract with Family Mart to manage its ad space at existing and future branches. The firm has also extended its contract with BIGC until 2019 (from 2018 previously) and will get additional ad space at Big C stores. Moreover, management expects to soon get additional ad space at BTS extension stations (seven new locations). The extra revenue from this new ad space (contributions are expected to start in FY15) should mitigate the impact of the loss of revenue from Tesco-Lotus.