RS

RS Plc   

Investment thesis

We feel more positive about the outlook for RS’s digital TV operation, given its ability to increase digital ad rates and sustain a top-five viewership rating. Hence, our FY15 net earnings forecast rises 12.8% (chiefly due to a higher assumed digital TVC slot utilization rate) and our YE15 target price increases from Bt20 to Bt21.80. BUY!

Digital TV will drive FY15 growth

Channel 8’s (CH8) audience share rose to 3.31% in Dec from 3.23% in Nov—fifth among commercial digital channels in Dec (maintained from Nov). CH8‘s current rating is 0.24 (153k viewers/min). RS targets a rating of 0.61 (400k viewers/min) by YE15 (and a rating of 0.42 by June 2015), which would rank it third behind CH7 and CH3. We believe CH8’s rating will rise further, led by new dramas and variety shows. The channel just added the Mae Luek Gerd Dai drama on Jan 15; it believes the show will boost its rating to 0.31 (200k viewers/min). 

CH8’s mean net ad rate rose to Bt25-30k/min in 1Q15 from Bt12k/min in 4Q14. Management guides that the rate will increase to Bt50/min in 2Q15. CH8’s targeted mean FY15 net ad rate range is Bt50-60k/min (4-5x higher than its FY14 rate), but we are skeptical that it is achievable, as its cost-per-rating-point (CPRP) is more expensive than that of Workpoint TV. As such, we conservatively assume Channel 8’s mean net ad rate at Bt40k/min for FY15. 

FY15 earnings forecast upgraded

We have upgraded our FY15 net profit forecast by 12.8% to Bt522m, mainly due to an expanded utilization rate assumption for CH8 for this year—up from 50% to 55%. Management guides for a mean utilization rate of 60-70% in FY15 (we think a 70% utilization rate is unrealistic, given CH8’s relatively high CPRP).

Note that RS now targets an FY15 top-line of Bt4.6bn and a net profit of Bt700m, led by its digital TV business. The firm expects revenue of Bt1.9bn in FY15 from CH8 (41% of RS’s top-line guidance). We think the guidance is too bullish, given that there will be intense competition between TV operators for ad spend this year and neither consumption spending nor advertising budgets have yet recovered significantly. 

YoY net profit growth expected for 4Q14

Although the absence of a World Cup compensation payment will make for weaker QoQ earnings in 4Q14, we expect YoY net profit growth, led by greater revenue from CH8. We now model for a bottom-line of Bt116m for the quarter, up 26% YoY but down 56% QoQ. We expect CH8’s receipts to post a jump of 45% QoQ to Bt330m, led by a higher mean net ad rate (from Bt9k/min in 3Q14 to Bt12k in 4Q14). Our FY14 net profit estimate is Bt443m, up 13% YoY.