MCOT

MCOT Plc 

 

Investment thesis

Although there is the issue of compensation from the NBTC for MCOT’s the return of its portion of 2600MHz bandwidth, which is a positive factor for MCOT and paves the way for a speculative trading opportunity, we regard it as a one-time event. As the huge recompense will be invested as CAPEX for its recurring business and will not be returned to shareholders as special dividends, we think the incremental value to MCOT will be insignificant due to its currently unsuccessful TV business operations. Meanwhile, we are not seeing any core business gains and there is no sign of such on the horizon. Our rating is changed to HOLD (from SELL) due to the recent share price tumble and the narrower valuation gap. We cut core earnings forecasts 34% for FY15 (to Bt55m) and by 42% for FY16 (to Bt101m), respectively, to factor in weaker 4Q15 earnings and greater content costs in FY16.

Huge remedy to stem from bandwidth returned to regulator 

MCOT is willing to return more than 60MHz of its 2600MHz bandwidth in 2H16 (144MHz in total) to the NBTC for the next auction, which will likely take place in 1H17 and expects greater compensation from the NBTC. This is pending the new NBTC law, expected in mid-2016, which will require the NBTC to pay compensation for frequencies of state enterprise units returned to the NBTC. Management expects the proceeds of the compensation to be invested in its TV content or the acquisition of a broadcasting firm or investment in an IT firm to increase its competitiveness. The remaining portions of 2600MHz bandwidth will be used for its pay-TV business with Playwork Co., Ltd. through a 15-year contract through which MCOT will receive the revenue sharing and Playwork will be the entity that invests. The pay-TV business with Playwork is expected to start in 2016. 

Special dividend payout looks unlikely

We believe that the action of returning the 2600MHz frequency portions must have the approval of shareholders (including the Ministry of Finance) given that it falls into the category of an asset sale. With the clear purpose of using most of the compensation as CAPEX to strengthen its core business, a special dividend payout to shareholders is unlikely. We estimate that the compensation would be roughly Bt3-6bn (or Bt4-9/share) assuming that it is roughly 5-10% of the Bt60bn appraised value of the 60MHz of 2600MHz spectrum. However, because most of this amount will be invested as CAPEX for MCOT’s current unsuccessful TV business, the incremental value from the compensation will not be as much as Bt4-9/share. We have not factored this into our model pending more clarity on this issue.  

Insights into 4Q15—core earnings dive  

We estimate a Bt40m net loss for 4Q15, a reversal from Bt54m 4Q14 and Bt63m 3Q15 net profits. There will be a one-time Bt42m bad debt provision in 4Q15 arisen from three clients delaying their digital network rental payments. Excluding such a one-time item, core profit would be Bt2m, down 96% YoY and 68% QoQ. The YoY core earnings plunge comes thanks to the tumble in ad revenue (TV and radio). The QoQ core tumble is led by a jump in SG&A. The TV (excluding new media) and radio revenues will drop 20% YoY and 11% YoY, respectively.