RS

RS Plc 

 

Investment thesis

 

We believe that RS’ 4Q15 core earnings will represent the best quarter of the year thanks to Channel 8’s revenue rise, the firm’s cost-saving program, the growing number of event business projects and the jump in cosmetic sales. After a period of difficulty for RS last year, due to the intense competition among digital TV business and unfavorable economic conditions, we believe that 2016 will be a better year for RS, underpinned by its cost reduction program and a rise in its digital ad rate, along with its digital rating rise. Our BUY rating stands.

Insight into 4Q15—best core earnings for the year

We kept our 4Q15 NPAT estimate of Bt43m, a jump of 60% QoQ (but flattish YoY), led by Channel 8’s higher revenue, the closure of loss making operations and the growing number of event projects. Disaggregated by unit, revenue from media dropped 19% YoY (owing to revenue from broadcast of La Liga in 4Q14), but was flattish QoQ on higher revenue from its radio and digital TV businesses—which offset the lack of income after the closure of loss-making operations.

Revenue from the music distribution business rose 7% YoY and 12% QoQ as the result of an improvement in digital music distribution from its LINE music project and YouTube channel. Showbiz revenue dropped 8% YoY but leaped 39% QoQ, due to the increased tailor-made events and two large exhibitions. Other business skyrocketed 370% YoY and 40% QoQ on the rise in its cosmetic sales.

Digital TV revenue continued to rise further

We expect its digital TV channel business to post a revenue rise QoQ in 4Q15, due to Channel 8’s greater mean utilization rate, in which we assume its utilization rate to rise to 65% in 4Q15, up from 55% in 3Q15 and 45% in 2Q15, but its ad rate will be maintained at Bt25k/min. We assume a rise in Channel 8’s mean ad rate to 30k/minute (up 20% YoY) with an 85% mean utilization rate for this year. Management guided that the firm had already sold 50% of advertising spots and product tie-ins for 2016 and targeted revenue of Bt4.5bn this year. However, the firm is more optimistic about ad rate prospects than we are, foreseeing its ad rate to jump to Bt32k/minute.

Defensive strategy adopted for 2016

Another key driver to support its earnings in 4Q15 through FY16 is its cost cutting, in which it plans to close unprofitable operations—Sabaidee Radio and Pleon TV—and restructure its satellite channel. Moreover, the firm plans to cut back its weekday super-prime air time for Thai soap operas from 90 to 60 minutes. To prepare for an extended period of economic slowdown, RS will adopt a more defensive strategy in 2016 to deal with the uncertainty, but it will be back on track after the firm sees signs of economic recovery.