Downgrade to sell
We have downgraded our BEC rating from HOLD to SELL, as we have factored net equity value erosion from the digital licensing platform into our model. As such, We have cut our earnings projections by 10percent for FY14 (to Bt4.25bn) to take account of digital losses in 8M14 and by 21percent for FY15 (to Bt3.95bn) tied to further digital losses and an analog ad rate decline. Our DCF-based valuation falls 17% to Bt40. The key risk factors are profit drops in 2H14-FY15 and lower analog ad rates.
Insights into 2Q14—YoY and QoQ earnings drop
We estimate a Bt1.13bn bottom-line for 2Q14, down by 21% YoY and 2% QoQ. The assumed profit decline is attributable to lower ad receipts (a persisting weak consumption environment) and heavy OPEX tied to digital TV licenses. We assume Bt77m in spectrum fee amortization expenses for its three digital licenses (which started April 25, 2014) in 2Q14. BEC paid Bt6.47bn in total for the three licenses—Bt666m for a kids channel, Bt2.27bn for a standard-definition (SD) variety channel and Bt3.53bn for a high-definition (HD) variety channel. There was no discernable ad spend surge tied to the 2014 FIFA World Cup in 2Q14.
We assume Bt3.72bn in ad receipts for the quarter, down 1% YoY (but up 6% QoQ), squeezed by ad budget-cutting among small and mid-scale clients—close to Nielsen's 2Q14 estimate of flattish YoY and up 5% QoQ. Nielsen's 2Q14 number indicates that BEC was the only operator to see flattish revenue (the others saw YoY falls). Revenue from concerts & shows (only one concert, Yoshiki Classical Live in BKK) is estimated to have dived by 68% YoY and 31% QoQ—the political chaos caused events to be postponed. GM is estimated at 47.5% in 2Q14, down from 53.9% in 2Q13 and 50% in 1Q14.
The digital TV platform factored in—Bt8/share net value erosion
We expect digital-related costs—content and production—to jump in 2H14 as BEC enters the second phase of 16-18 hours of digital TV broadcasting in 3Q14 and the third phase of 24-hour broadcasting in 4Q14. However, we assume only insignificant revenues from its three digital channels in 2H14, due to its relatively weak digital TV programming and the absence of Nielsen ratings (which we expect to start in 1H15). As such, 2H14 earnings will deteriorate HoH and YoY.
Our model indicates aggregate net losses for the three digital channels of Bt498m for 8M14 and Bt418m in FY15 and then an aggregate net profit of Bt408m for FY16. We estimate net value erosion of Bt8/share from the digital licensing regime—analog value erosion of Bt24/share caused by an analog ad rate decline, which we expect to outweigh the effect of value creation by the three digital channels of about Bt16/share (Bt7/share for the HD channel, Bt8/share for the SD channel and Bt1/share for the kids channel).