RS Plc

We are positive on management’s strategy and action plan to control costs. The leaner the company is, the better prepared it will be to deal with the tough industry conditions, high competition and softer adex caused by the current weak economy. We now believe that RS’s non-TV business growth will be more than enough to spur a faster earnings recovery than we had expected earlier. We upgrade our target price to Bt13.00 (from Bt10.50) and our rating to Outperform (from Neutral).   

Investment highlights 

- Strong event and other businesses fill hole left by soft adex. RS has continued to generate strong event revenue with its backlog carried into 2016 (most of which will be booked in 1Q16) equal to the level at end-2014. The company’s new businesses (beauty products and nutritional supplements), which showed impressive six-fold growth from 2014 to 2015, are expected to continue performing well and to account for 14% of total revenue in 2016. We expect event and other business will account for 33% of 2016 revenue, which could have a significant beneficial impact on earnings. This contribution will be especially important this year, given the soft media outlook, with a recovery not expected until at least 2Q16. 

- Termination of loss-making units will significantly improve earnings. RS has adjusted the operation of “You Channel” and also shut down “Sabai Dee Radio” and “Ploen TV” (satellite TV) in mid-4Q15. The 3 units had contributed losses of Bt53mn, Bt12mn and Bt43mn in 2015. This action will reduce operating costs and help RS save as much as Bt20-25mn per quarter on expenses. We expect the full benefit from the cost-cutting will be seen at its bottom line from 1Q16 onward.  

- Programming reshuffle to help control costs and boost ratings. To prepare for the expected soft adex in 1Q16, RS has cut back on expensive program production. It has reduced weekday drama programming from 90 minutes to 60 minutes and cancelled the launch of a new weekend drama (Sat-Sun) in 1Q16. It has also moved some popular programs from its satellite TV operation (Ploen TV & Ch.2) to Ch.8 to strengthen the flagship channel.  

- Impact from change in DTTV accounting. Although a change in its accounting treatment of digital-license payments may impact near-term earnings, it does not impact cash flow or the company’s valuation. RS has applied a discount rate of 4.5% to the cost of the license, which will cause an additional financial cost (via its P/L) of approximately Bt5mn to Bt67mn per year. Note that the biggest impact to earnings has already been seen, in 2015, and it will decline before having no significant impact in 2018. As such, the market’s concerns about the earnings of DTTV players may represent a good buying opportunity in the case of RS. 

- Revise up 2016-18 earnings estimates by 22-82%. Although we have lowered our 2016 ad-rate assumption to Bt26,400 per minute from Bt30,000 per minute due to the unfavorable market conditions, we have revised up RS’s earnings for 2016-18 by 22-82% to reflect the strong contribution of event revenue and the strong growth of new businesses (beauty products and nutritional supplements). 

Valuation 

- We upgrade RS’s rating to Outperform (from Neutral) and revise up our target price to Bt13.00 (from Bt10.50), based on a DCF methodology with a 10.02% WACC and 3% terminal growth rate. Our new target price implies 29% upside and a forward 2016 PER of 35.7x.