Mirae Asset Sekuritas Indonesia Sector Update
Media – Winning audience share is not enough by Christine Natasya (natasya)
Sep 14, 2018
Media – Winning audience share is not enough
Ad spend lower due to efficiency efforts at FMCGs
In 2Q18, private consumption growth improved to 5.14% YoY (vs. 4.95% YoY in 1Q18 and 2Q17). Food and beverages (including restaurants), which account for the bulk of private consumption (around 37%), grew 5.38% in 2Q18 (vs. 5.25% in 2Q17), followed by transportation at 5.32% (vs. 5.28% in 2Q17 and 5.13% in 1Q18). The growth in 2Q18 resulted from Lebaran effects as well as the low base in 2017. Despite the acceleration in private consumption growth, we note that fast-moving consumer goods (FMCG) companies held back on ad spend during 2Q18 (vs. 2Q17), partly due to the extended Lebaran holidays in the quarter. While we expect some of the ad spend is being diverted to 3Q18, we think companies are also pursuing efficiencies due to a rise in USD-linked raw material costs. Raw materials—which make up most of consumer companies’ cost of goods sold (COGS)—are mostly imported and/or linked to the USD as the global benchmark.
Slowing earnings growth
Over the past five years, both Surya Citra Media (SCMA) and Media Nusantara Citra (MNCN) have seen single-digit or even negative bottom-line growth, worse than in past years. We believe this is due to the increase in digital and online advertising coupled with Indonesia’s slowing economic growth, especially from private consumption (the largest component of Indonesia’s GDP).
Rupiah depreciation negative to bottom lines
Over the past three years, SCMA’s valuation has consistently been higher than MNCN’s. This is justified, given the company’s higher 2018F ROE (34%) vs. MNCN’s (15%). Nonetheless, the valuation gap has widened significantly since the end of 2015. In our view, this is because MNCN’s bottom line has been burdened by significant F/X losses since 2015, as the company has held high USD-linked debt since 2014. In 2Q18, MNCN booked F/X losses of IDR167bn due to rupiah depreciation.
MNCN’s share price has declined 36% YTD, weighed by the depreciation of the rupiah against the greenback and the fact that the company holds long-term debt amounting to USD250mn (equivalent to 84% of its total interest-bearing liabilities in 2Q18, which was IDR4.4tr). Although we revised down our F/X loss estimate for 2018, the rupiah’s unpredictable movement will remain a de-rating factor for MNCN’s valuation, especially in the midst of negative bottom-line growth. We believe the Fed’s stance on inflation means more bad news for borrowers. Given their similar business nature, the gap between SCMA’s and MNCN’s valuation should stay at the same level, implying a de-rating on the overall TV media industry.
Cheap valuation, but not the right time
SCMA and MNCN are currently trading at -2 standard deviations, which would normally be considered undervalued. In the current circumstances, however, we believe the market is not receptive toward the industry. In addition, despite audience share gains at both SCMA and MNCN, share prices are not reflecting the gains. We downgrade our investment rating on the sector to Neutral (from Overweight). We believe we could see further upside when 1) media companies start to book significant revenue from content sold to outside digital platforms, 2) global sentiment starts to unwind, 3) the rupiah appreciates, and 4) investments in digital platforms start to bear fruit.
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