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GMM Grammy

More ambitious GMM Z target HOLD (maintained) Target Price: Bt19.50 Price (04/04/12): Bt20.20

GMM Grammy Plc (GRAMMY)

Investment thesis: We reiterate our HOLD rating on GRAMMY, due to a fully-stretched valuation. Although we expect a post-flooding core business recovery this year, the bottom-line will be dampened by initial losses at new ventures—GMM Z satellite TV and the home shopping JV. Given the strong possibility of a low or zero dividend payout for FY12 in order to reserve cash for new investment CAPEX, we regard the stock unfavorably at the moment. Management has upped its FY12 GMM Z set-top box sales target, but we are skeptical that the target is achievable, given the intensely competitive environment and the large number of free-to-air satellite broadcasters.

Higher FY12 GMM Z set-top box sales target: The firm recently rebranded its satellite TV operation from "1-Sky" to "GMM Z" (soft launch in Feb; official launch in early April). Set-top boxes will be available for sale at Big C, Tesco Lotus, 7-Eleven outlets and AIS branches this month. Management has revised up its FY12 set-top-box sales target from 1.5m to 2m. The firm also guides for subscription revenue equal to 10-15% of total set-top box sales, up from previous guidance of 5%.

GMM Z to incur losses in FY12: We assume that GMM Z will post net losses for 1.5-2 years before breaking even in FY14. Because the firm has upped its set-top box and subscription projections, it now claims that the GMM Z net loss for FY12 will be only Bt200-250m, shallower than its earlier estimate of Bt400-500m. We assume profitability in FY14, so long as 2m set-top boxes are sold by YE13 (faster set-box sales would mean a shorter run to profits). GRAMMY said it is looking for a strategic partner to co-bid for the English Premier League in 2H12 (estimated budget of Bt2-3bn).

Uncertainty of the new businesses: We expect the home shopping JV with CJ O Shopping Co (a South Korean firm), which will start operating in June 2012, to post a proportionate net loss of Bt100-150m for FY12. The two new ventures are likely contribute a total FY12 net loss of Bt300-400m to GRAMMY. Due to the inherent uncertainty surrounding forecasts for the satellite TV and home-shopping operations, we haven't yet factored them into our model. We will do so when more information is available about the two ventures.




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