Major Cineplex Group

Major Cineplex Group Plc (MAJOR)  

 

We expect 3Q15 core earnings of Bt230mn, down 6% YoY, led down by fewer promotional activities and the economic slowdown. Revenue growth is thus less than we had expected and we are revising our forecasts down by 15% from 2015 onward. This leads to a cut in our DCF TP to Bt36 (from Bt42). We maintain our Buy call on the stock as we expect earnings to resume growth from 4Q15 onward.    

Preview 3Q15. We discussed 3Q15 with management to obtain a preview. The overall tone was negative. Takeaways are summarized below. Note that seasonality plays a significant role in the fluctuation in quarterly earnings and 2Q is the normal peak quarter for the movie business. For this reason we use a YoY comparison. 

1) Revenue is likely to be flat or down slightly from 3Q14, dragged down by major business units (movies, concession and advertising). For the movie business, the firm blames a weaker movie lineup compared with 3Q14 – despite the fact that movie lineup in 3Q15 included the tail end of Jurassic World, Mission Impossible 5, Terminator and Fantastic Four. Concession revenue - directly linked with movies – will also see no YoY growth in the quarter. Advertising, its high-margin business, cannot compete with last year given the poorer economic condition.        

2) Gross margin is likely to contract slightly from 3Q14 as about 37 new screens are set to open up. This will raise the cost side of the movie business.  

3) SG&A will be little changed YoY since it has put a number of cost controls into action since the start of this year. 

4) MAJOR will book an extra gain of Bt90mn from the sale of a portion of its holding in PVR Limited (PVRL), cinema operators in India. As of 2Q15, MAJOR holds ~4.57%. 

Net profit estimated at Bt320mn in 3Q15, up 9% YoY but down 35%QoQ. Stripping out extra gain of Bt90mn from selling some of its holding in PVRL, core earnings are expected to be Bt230mn, down 6% YoY. The key culprits are: 1) 5% YoY drop in revenue led by falls in movie, concession, and advertising and 2) contraction in gross margin from opening up new screens.  

Stand by expectation of earnings growth cycle. Our new earnings forecast still posits 14% earnings growth in 2015 - outperforming other media stocks, especially TV operators, who are suffering from the economic slowdown and fiercer competition, followed by 10% growth in 2016.    

Buy with new target price of Bt36. We reiterate our Buy call on the stock despite our cut in TP to Bt36 from Bt42 in response to the cut in earnings. MAJOR remains a growth stock, very rare in the media sector. While MAJOR is not cheap in terms of PE, we see further room for the stock to re-rate due to superior earnings growth.