VGI Global Media

VGI Global Media Plc (VGI) 

 

Investment thesis

In our view, VGI’s strategic decision to step away from the low-margin modern trade media business should improve the firm’s forward profitability. Even so, there will be negative impacts on its short-term earnings from a one-time provision for the termination of modern trade business provision and loss of revenue after that termination. We think however that the firm’s long-term growth potential should prevail, both from BTS-related media (extension lines), and office building and other media businesses. 

The recent share price correction of 23% was an excessive discount on the potential impact from this strategic decision, which is expected to have only a 6% negative impact on the firm’s long-term earnings, we believe. In addition, there is an upside potential to the firm’s dividend payment from idle CAPEX. We have therefore upgraded our rating for the stock to HOLD from SELL, with a revised end-March 2016 target price of Bt5.20 (from Bt5.50). 

Termination of contracts with BIGC  

Management expressed at the analyst meeting yesterday that VGI will terminate the Advertisement Display Concession Agreements (ADCA, sales floor and non-sales floor) with BIGC and this would take effect from April 30 onwards. The firm currently manages advertising spaces for 160 BIGC branches countrywide. According to management, the reason for the contract terminations was that BIGC had failed to comply with the terms contained in those agreements. 

Withdrawal from modern trade media business

The expiration of the ADCA with Tesco Lotus in Feb, together with the termination of the ADCA with BIGC, finally led the company to make the strategic decision to step away from the modern trade media business, management guided. Given that, the firm will set aside a one-time provision for the termination (Bt215m) in its 4Q14/15 (Jan-Mar) financial statements, based on a conservative accounting basis.

Minimal impact on long-term earnings

We are optimistic about this strategic decision as the modern trade business normally generates the lowest gross margin among VGI’s portfolio. In 3Q14/15 (Oct-Dec 2014), the GPM of BTS-related media was 75%, while the GPM of office building & other media was 65%. Meanwhile, the GPM of modern trade media was only 8%. As such, VGI’s forward profitability will be better. As VGI will no longer operate in that segment, we have therefore slashed our long-term revenue projections by 28% on average. However, we have cut our long-term earnings forecast by only 6%, as the GPM of modern trade media is low and there will be operational-cost savings. In addition, there will also be free CAPEX of Bt165m for FY15/16.