RS

RS Plc

 

Investment thesis

A 26% retreat in share price over the past three weeks overly reflects diminished earnings expectations—the current valuation is now close to our worst-case scenario of Bt10.20, where a 60% utilization rate is assumed to prevail over the concession’s life (deemed too conservative). Earnings-wise, 1Q15 will see the worst and a shallower loss is expected in 2Q15, which will flip into the black buoyed by a firm recovery of the digital TV unit (Channel 8); long-term outlook for its digital TV business remains promising. RS remains one of our two preferred picks within the Thai Media space. Reflecting our recent earnings cut, we have trimmed our target price to Bt16 from Bt19.20. 

FY15 forecast trimmed, but next year’s outlook still shows promise 

We downgrade our net profit forecast 59% to Bt167m for FY15 due to weaker-than-assumed 2015 earnings and more conservative assumption of our FY15 mean ad rate from Bt30k/min to Bt25k/min. But, we remain bullish on RS’ 2H15 onward outlook on the solid long-term prospects for its digital TV unit in 2H15 and 2016. Ahead, a revenue recovery and digital TV income expansion, led by expected higher ad and utilization rates, will drive next year’s profitability—we anticipate a hefty 111% YoY expansion to Bt353m.

Strategic shift to improve utilization rate 

Channel 8’s rating was fourth among commercial digital channels in May (0.314, up from 0.298 in April), and its audience share rose from 4.08% in April to 4.25% in May. It now enjoys viewership of ~250k viewers/min, and we expect a rise to ~350k viewers/min in 2H15. Its audience share and rating should grow further in 2H15, led by new content—10 soap opera slots and five variety shows. We conservatively assume a flat ad rate of Bt25k/min throughout the year. Due to weak ad spending, RS is adopting a more flexible strategy to drive its utilization rate rather than hike ad rates. Thus, its cost per rating will be comparable to WORK’s (which ranges Bt58k-Bt60k). RS’ utilization rate should rise to 60-70%, on par with WORK’s current level.

Shallower loss expected in 2Q15…

We expect the firm to post a shallower net loss of Bt10m in 2Q15 against Bt41m net loss in 1Q15. The gain will be led by media revenue–-up 14% QoQ due to recovery in digital TV and the launch of the LINE music project. Revenue from showbiz should report QoQ growth, driven by a big concert—D2B Encore Concert 2015 in April. 

… 2H15 to flip into black ink 

We believe RS’ performance will show a strong bounce in 2H15, led by further gains at its digital TV unit and its new business strategy. We expect a higher utilization rate in 2H15 as Channel 8’s ratings and audience share should continue their uptrends. RS has implemented a business strategy with the aim to become a “one-stop service” in the music industry, which bundles products in one package for its resellers (e.g. MVs with Youtube). Also, event business will be another key driver, as major events will be held in 2H15, such as Shimi Club 2015, and Lukthung Festival 5. Nonetheless, we preserve our conservative contributions from two new business units.