Workpoint Entertainment PCL In a consolidation phase
Action and recommendation
► We cut our 2014-16 earnings forecasts by 47.6-55.3% after taking into account the impact of WORK’s digital TV project and the dilution effect from a recent capital increase. Also, our more conservative view on the expansion of its TV production business has a significant impact on our projections. Our 2014 DCF-based fair value is thus sliced to Bt31.50 from Bt40.00. Nevertheless, we maintain our “Outperform” rating on the stock given the nice potential upside of 23.5% from the latest closing price to our new fair value and the limited downside due to the share price’s recent sharp contraction. Despite the supporting valuation, we recommend gradually accumulating the stock given the unattractive earnings growth outlook in the next few years, due to the pressure from expected losses in the early years of the TV digital business.
Key investment points
► An investment year for digital TV. We cut WORK’s earnings by 47.6-55.3% during 2014-16 to correct our earlier overly bullish view of WORK’s strategies, and to take into account the huge expenses from the digital TV project in the early years and the weaker-than-expected 4Q13 earnings result. We now expect its 2014 earnings will fall by 14.9% YoY, hitting a new low for the past 3 years, before surging 13.4% in 2015 and then 31.3% in 2016. We attribute the strong expected recovery to an improvement in margin as we believe that WORK will shift most of its popular TV programs currently being aired on existing channels to its own network, which will allow it to achieve a higher margin.
► Changing strategy to boost margin. WORK aims to focus on its own TV channel after obtaining the digital TV license. Many of its popular TV programs
being broadcast by the incumbent TV operators will be transferred to WORKPOINT TV after 2014. This strategy may lower WORK’s revenue growth as it cannot charge ad rates as high as those imposed by the existing free-TV channels. Still, we expect that WORK will be able to manage its earnings to grow ttractively given it will be able to achieve a higher margin at its own channel as it will no longer have to pay the huge air time fees it currently pays to the existing free-TV operators.
► Well positioned in a newly competitive landscape. According to the NBTC, the platform operators such as GRAMMY, RS or PSI will have the right to allocate channel numbers to the first 10 TV channels as they see fit. Thanks to its strong relationship with PSI, WORKPOINT TV will be allocated the Channel 1 slot on every PSI box. Given that 7.28 million households, or 33.1% of the total number of Thai households, watched TV via the PSI platform in 2012, we see WORK getting an advantage from this over other TV operators.
► Short-term pain, long-term gain. Since the results of the digital TV auction were announced, WORK’s share price fell by more than 20% before rebounding to generate a negative return of 2.8%. This means it has clearly underperformed RS, BEC and MCOT, which have generated returns of 18.3%, 2.0% and 1.0%, respectively, over the same period. In our view, the current price mostly takes into account the disappointment related to the TV auction price and the recent capital increase announcement. The downside is thus limited in our view. Meanwhile the startup of digital TV broadcasting may revive interest in the stock if WORK can demand higher ad rates than the market was expecting. However, as the digital TV project will likely take time to prove its success while in the short-term earnings will be pressured by the incremental costs of the project, we recommend investors gradually accumulate this stock despite the nice potential upside of 23.5% from the latest closing price to our new fair price.
Price catalysts
► ADEX number and official launch of digital TV
WORK TB Outperform
Close Price*13/03/2014 Bt25.50
12-month target Bt 31.50
Upside/Downside % 23.5
Valuation DCF
Sector Media
Market Cap Btm 6,556
30-day avg turnover Btm 34
No. of shares on issue m 257
CG Scoring (2013) Good
Investment fundamentals
WORK TB rel SET performance
Source: SET Smart
(all figures in THB unless noted)
Action and recommendation
► We cut our 2014-16 earnings forecasts by 47.6-55.3% after taking into account the impact of WORK’s digital TV project and the dilution effect from a recent capital increase. Also, our more conservative view on the expansion of its TV production business has a significant impact on our projections. Our 2014 DCF-based fair value is thus sliced to Bt31.50 from Bt40.00. Nevertheless, we maintain our “Outperform” rating on the stock given the nice potential upside of 23.5% from the latest closing price to our new fair value and the limited downside due to the share price’s recent sharp contraction. Despite the supporting valuation, we recommend gradually accumulating the stock given the unattractive earnings growth outlook in the next few years, due to the pressure from expected losses in the early years of the TV digital business.
Key investment points
► An investment year for digital TV. We cut WORK’s earnings by 47.6-55.3% during 2014-16 to correct our earlier overly bullish view of WORK’s strategies, and to take into account the huge expenses from the digital TV project in the early years and the weaker-than-expected 4Q13 earnings result. We now expect its 2014 earnings will fall by 14.9% YoY, hitting a new low for the past 3 years, before surging 13.4% in 2015 and then 31.3% in 2016. We attribute the strong expected recovery to an improvement in margin as we believe that WORK will shift most of its popular TV programs currently being aired on existing channels to its own network, which will allow it to achieve a higher margin.
► Changing strategy to boost margin. WORK aims to focus on its own TV channel after obtaining the digital TV license. Many of its popular TV programs
being broadcast by the incumbent TV operators will be transferred to WORKPOINT TV after 2014. This strategy may lower WORK’s revenue growth as it cannot charge ad rates as high as those imposed by the existing free-TV channels. Still, we expect that WORK will be able to manage its earnings to grow ttractively given it will be able to achieve a higher margin at its own channel as it will no longer have to pay the huge air time fees it currently pays to the existing free-TV operators.
► Well positioned in a newly competitive landscape. According to the NBTC, the platform operators such as GRAMMY, RS or PSI will have the right to allocate channel numbers to the first 10 TV channels as they see fit. Thanks to its strong relationship with PSI, WORKPOINT TV will be allocated the Channel 1 slot on every PSI box. Given that 7.28 million households, or 33.1% of the total number of Thai households, watched TV via the PSI platform in 2012, we see WORK getting an advantage from this over other TV operators.
► Short-term pain, long-term gain. Since the results of the digital TV auction were announced, WORK’s share price fell by more than 20% before rebounding to generate a negative return of 2.8%. This means it has clearly underperformed RS, BEC and MCOT, which have generated returns of 18.3%, 2.0% and 1.0%, respectively, over the same period. In our view, the current price mostly takes into account the disappointment related to the TV auction price and the recent capital increase announcement. The downside is thus limited in our view. Meanwhile the startup of digital TV broadcasting may revive interest in the stock if WORK can demand higher ad rates than the market was expecting. However, as the digital TV project will likely take time to prove its success while in the short-term earnings will be pressured by the incremental costs of the project, we recommend investors gradually accumulate this stock despite the nice potential upside of 23.5% from the latest closing price to our new fair price.
Price catalysts
WORK TB Outperform
Close Price*13/03/2014 Bt25.50
12-month target Bt 31.50
Upside/Downside % 23.5
Valuation DCF
Sector Media
Market Cap Btm 6,556
30-day avg turnover Btm 34
No. of shares on issue m 257
CG Scoring (2013) Good
Investment fundamentals
WORK TB rel SET performance
Source: SET Smart
(all figures in THB unless noted)
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