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VGI Global Media

1Q14 earnings beat estimate; gradual recovery expected in 2Q14

VGI Global Media Plc (VGI)

Above estimate

VGI posted a 1Q14 (April-June) net profit of B257m, down 16% YoY but up by 33% QoQ. Stripping out non-recurring survey and business development expenses of Bt10m, the core profit would be Bt268m, down 13% YoY but up 39% QoQ. The core profit beat our estimate and the consensus by 8%, due to a fatter-than-expected gross margin. Sales and SG&A expenses were in line with our numbers.

Results highlights

Sales dropped 10% YoY but rose 19% QoQ to Bt773m, in line with our estimate. Although industry-wide ad spending was weak during the quarter (down 10.3% YoY and up just 4.3% QoQ on seasonality), advertising receipts at the mass transit system rose by 8% YoY and 10% QoQ to Bt434m. In-store billings dived 26% YoY but rose 30% QoQ to Bt286m. Revenue from advertising space in office buildings and other media declined 9% YoY but rose 46% QoQ to Bt42m. GM was 55%, above our estimate of 53%, driven by better-than-modeled GM across all media categories.

BTS-related GM rose to 79percent from 77% in 4Q13 (but declined from 82% in 1Q13), while in-store media GM increased to 17percent from only 3% in 4Q13 (but dived from 28% in 1Q13). Office building GM rose to 68percent from 57% in 4Q13 (but slipped from 73% in 1Q13). The QoQ GM improvement was driven largely by seasonality, but VGI might also have benefited from ad spend migration from other types of media. The YoY GM contraction was due to higher depreciation expenses for new digital media. There were small financial costs as a result of loan draw-down during the quarter.

Outlook

Profit should rise QoQ in 2Q14 (July-Sept), driven by stronger ad spending. However, on a YoY basis, ad receipts will remain down—the outlook for ad spending among fast-moving consumer goods producers still mixed. We do not anticipate any ad rate rises during FY14, as occupancy rates remain low (especially for modern trade media). With regard to management guidance of FY14 top-line growth of 13-17%, our assumption is 9%—we see downside risk to VGI's FY14 target.

What's changed?

1Q14 net profit represents 22% of our FY14 forecast of Bt1,178m which we maintain unchanged.

Recommendation

Another YoY earnings dive is expected for 2Q14 (July-Sept).As such, FY14 core earnings should post modest growth of 2% YoY. We believe that VGI's valuation premium is no longer deserved, due to its slower growth profile—an FY13-16 EPS CAGR of 22% against an FY10-13 EPS CAGR of 30%. Moreover, its valuation is stretched—an FY14 PER of 48x against a peer mean of 26x. Although there might be scope for share price upside from M&As, that scope is severely limited by warrant conversion.


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