Regional Morning Notes Monday , 15 August 2016 COMPANY RESULTS SELL MCOT Plc (MCOT TB) (Maintained) 2Q16: Lower-than-expected losses Share Price Bt15.10 MCOT saw a loss of Bt65m in 2Q16, but this was lower than market expectation. Sales Target Price Bt10.60 dropped yoy as MCOT lost its competitiveness in TV channels, but increased qoq from Upside -29.8% the seasonal effect. MCOT may see large loss in 2016 due to poor 1H16 earnings. (Previous TP Bt8.40) However, the expectation of MCOT receiving a large compensation on returning the 60MHz spectrum for 4G bidding has caused share price to surge, although contribution COMPANY DESCRIPTION to bottom-line is still unclear. Maintain SELL. Target price: Bt10.60. Free TV Operator 2Q16 Results Year to 31 Dec 2Q15 1Q16 2Q16 yoy qoq Remarks (Btm) (Btm) (Btm) %chg %chg STOCK DATA Sales 890 698 753 -15% 8% Sales decrease yoy from GICS sector Consumer Discretionary losing its competitiveness on TV channels but Bloomberg ticker: MCOT TB increased qoq from Shares issued (m): 687.1 seasonally effect Market cap (Btm): 10,375.2 Gross profit 308 61 153 -50% 151% SG&A expense 251 232 222 -11% -4% Market cap (US$m): 298.5 Other income 58 23 75 30% 227% 3-mth avg daily t'over (US$m): 0.5 EBIT 57 - - -223% NM 171 70 Price Performance (%) EBT 37 - - -327% NM 52-week high/low Bt16.00/Bt7.55 185 84 Net profit 29 - - -322% NM 1mth 3mth 6mth 1yr YTD 147 65 48.0 69.7 69.7 29.1 83.0 Ratio-% Major Shareholders % Gross margins 32% 8% 18% Ministry of Finance 65.8 EBITDA margins 28% -24% -8% Net margins 3% -20% -8% Government Saving Bank 11.5 DE-x - - - Thai NVDR 2.2 Source: MCOT Plc, UOB Kay Hian FY16 NAV/Share (Bt) 10.56 FY16 Solvency Ratio (%) PRICE CHART (THB) MCOT PCL MCOT PCL/SET INDEX (%) 20 170 18 150 16 130 14 110 KEY FINANCIALS 12 Year to 31 Dec (Btm) 2014 2015 2016F 2017F 2018F 10 90 70 Net turnover 4,284 3,572 3,269 3,840 4,397 8 EBITDA 1,156 683 329 779 822 6 50 30 Operating profit 404 (129) (471) (21) 22 Volume (m) 20 Net profit (rep./act.) 413 58 (223) 51 83 10 Net profit (adj.) 413 58 (223) 51 83 0 EPS (Bt) 0.6 0.1 (0.3) 0.1 0.1 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 PE (x) 25.1 179.5 n.m. 203.3 124.6 Source: Bloomberg P/B (x) 1.4 1.4 1.4 1.4 1.4 EV/EBITDA (x) 8.8 14.9 30.9 13.1 12.4 ANALYSTS Dividend yield (%) 3.0 0.8 (1.6) 0.4 0.6 Net margin (%) 9.6 1.6 (6.8) 1.3 1.9 Thunya Sutavepramochanon Net debt/(cash) to equity (%) (12.3) (6.0) (3.1) 5.2 19.7 +662 659 8031 Interest cover (x) 18.4 8.8 6.8 19.2 18.6 [email protected] ROE (%) 5.4 0.8 n.a. 0.7 1.1 Consensus net profit - - (250) (164) (109) UOBKH/Consensus (x) - - 0.89 n.m. n.m. Source: MCOT Plc, Bloomberg, UOB Kay Hian n.m. : not meaningful; negative P/E, EV/EBITDA reflected as "n.m." Refer to last page for important disclosures. 1 Regional Morning Notes Monday , 15 August 2016 RESULTS TV RATING RANKED AS OF JUN 16 Incurs loss in 2Q16. MCOT posted a net loss of Bt65m in 2Q16, improving slightly from Rank Digital TV channels Jun 16 1Q16’s net loss of Bt147m but worse than 2Q15 which saw net profit of Bt29m. However, the loss amount in 2Q16 was lesser than market expectation. Sales in 2Q16 decreased TVR 15% yoy as MCOT lost its competitiveness in TV channels and economic recovery remains 1 Channel 7 (Analog &HD) 2.56 slow, but increased 8% qoq from the seasonal effect. Note that advertising sales from TV (which accounted for 38% of total sales in 2Q16) dropped 32% yoy but increased 15% qoq. 2 Channel 3 (Analog &HD) 1.45 Gross margin declined from 32% in 2Q15 to 18% in 2Q16 but improved from 8% in 1Q16. Nevertheless, SG&A expense to sales in 2Q16 was 27%, down from 32% in 1Q16. 3 WORK 0.85 STOCK IMPACT 4 MONO 29 0.53 Large losses expected for 2016. Although 3Q16 financial performance would improve 5 ONE 0.42 qoq thanks to the seasonal effect and better economic situation, we think MCOT could 6 Channel 8 0.42 incur a large loss on a full-year basis owing to bad results in 1H16, which was a Bt212m net loss. 7 Channel 3 SD 0.27 Maintain the view that TV business is not strong. TV rating of Channel 9 (analogue and 8 Thairath TV 0.23 HD) in Jun 16 was 0.187 which was about the same in Mar 16 but declined sharply from 0.295 in Jun 15. In addition, Channel 9 (analogue and HD) has lost its 8th position in ratings 9 TRUE4U 0.20 among 24 digital TV channels in Mar 16 and fallen to 10th in Jun 16. 10 Channel 9 (Analog &HD) 0.19 Share price has jumped 92%ytd on speculations of a large compensation for Source, MCOT, Nielsen returning the 60MHz spectrum for 4G licence bidding. Although MCOT could possibly incur a large loss for 2016, its share price has been performing very well, having jumped 92% ytd as investors are expecting MCOT to receive a large compensation on returning the 60MHz spectrum for 4G licence bidding. However, we maintain the view that the benefit of this compensation on bottom-line is still unclear (previously mentioned in our report published on 21 Jan 16). This is because management revealed that the appraisal value of these 4G licenses has to be done by a third-party organisation while the compensation amount and conditions to MCOT are under negotiation. Furthermore, from management’s perspective, MCOT will not return this incremental income to shareholders via special dividend but instead use it to invest more in media content, IT systems, etc to improve business competitiveness which should add company value in the future. In a very optimistic case, we think the compensation amount may be Bt60b or equivalent to Bt5.8/share under our assumption that all three licences (20MHz for each licence) are worth an equal Bt40b each and MCOT gains half of the licence value as compensation and recognises the compensation by spreading it equally over 15 years. EARNINGS REVISION/RISK No significant change in earnings projection. VALUATION/RECOMMENDATION We maintain SELL with 2017 target price at Bt10.60, based on 1x 2017F P/B. We think all good news has already been priced in. SHARE PRICE CATALYST New source of revenue. Refer to last page for important disclosures. 2 Regional Morning Notes Monday , 15 August 2016 PROFIT & LOSS BALANCE SHEET Year to 31 Dec (Btm) 2015 2016F 2017F 2018F Year to 31 Dec (Btm) 2015 2016F 2017F 2018F Net turnover 3,572 3,269 3,840 4,397 Fixed assets 3,580 3,796 3,796 3,796 EBITDA 683 329 779 822 Other LT assets 4,348 4,314 4,216 4,120 Deprec. & amort. 811 800 800 800 Cash/ST investment 441 228 422 358 EBIT (129) (471) (21) 22 Other current assets 3,272 3,233 3,957 5,259 Total other non-operating income 267 248 148 148 Total assets 11,642 11,571 12,391 13,533 Net interest income/(expense) (78) (49) (41) (44) ST debt 0 0 800 1,800 Pre-tax profit 61 (271) 87 126 Other current liabilities 1,534 1,831 1,804 1,838 Tax (17) 49 (16) (23) LT debt n.a. n.a. n.a. n.a. Minorities 14 (1) (20) (20) Other LT liabilities 2,727 2,466 2,473 2,557 Net profit 58 (223) 51 83 Shareholders' equity 7,355 7,254 7,295 7,318 Net profit (adj.) 58 (223) 51 83 Minority interest 26 20 20 20 Total liabilities & equity 11,642 11,571 12,391 13,533 CASH FLOW KEY METRICS Year to 31 Dec (Btm) 2015 2016F 2017F 2018F Year to 31 Dec (%) 2015 2016F 2017F 2018F Operating 292 398 821 813 Profitability Pre-tax profit 61 (271) 87 126 EBITDA margin 19.1 10.1 20.3 18.7 Tax (17) 49 (16) (23) Pre-tax margin 1.7 (8.3) 2.3 2.9 Deprec. & amort. 811 800 800 800 Net margin 1.6 (6.8) 1.3 1.9 Working capital changes (259) (229) (90) (134) ROA 0.5 n.a. 0.4 0.6 Other operating cashflows (304) 49 41 44 ROE 0.8 n.a. 0.7 1.1 Investing (528) (727) (1,417) (1,817) Capex (growth) (1,004) (2,017) (2,017) (2,017) Growth Others 476 1,290 600 200 Turnover (16.6) (8.5) 17.5 14.5 Financing (223) 116 790 940 EBITDA (40.9) (51.8) 136.5 5.5 Dividend payments (206) 116 (10) (60) Pre-tax profit (88.1) (544.1) n.a. 45.4 Issue of shares n.a. n.a. n.a. n.a. Net profit (86.0) (485.7) n.a. 63.2 Others/interest paid (17) 0 800 1,000 Net profit (adj.) (86.0) (485.7) n.a. 63.2 Net cash inflow (outflow) (459) (213) 194 (64) EPS (86.0) (485.7) n.a.