Thailand Company Guide Workpoint Entertainment PCL Version 15 | Bloomberg: WORK TB | Reuters: WORK.BK Refer to important disclosures at the end of this report DBS Group Research . Equity 14 May 2018 HOLD (Downgrade from BUY) Wait and see Last Traded Price ( 11 May 2018): Bt60.25 (SET : 1,765.93) Price Target 12-mth: Bt66.00 (10% upside) (Prev Bt81.00) Downgrade from BUY to HOLD with lower TP of Bt66. Given Analyst the softer-than-expected 1Q18 earnings, we have cut our Nantika WIANGPHOEM +66 28577836 [email protected] FY18/FY19 forecast by 19%/18% to reflect a more conservative outlook for revenue and gross margins due to intense What’s New competition in the industry. WORK’s ratings dropped to c.1.06% in 1Q18 from c.1.3-1.4% in 2017, and this started to • 1Q18 net profit came in at Bt166m (-4% y-o-y), fully recover in April 2018, However, we believe although WORK is recovering from last year’s cremation of the former king still able to increase its ad rate, its utilisation rate might not but still disappointed the market reach the 2018 target of 70% vs 67% for last year. Hence, • Revised down earnings forecast by 19%/16% in given the limited upside to our new TP of Bt66 (based on DCF FY18/FY19 to reflect more conservative view valuation) and a more conservative outlook for the industry, we • Downgrade from BUY to HOLD with lower TP of Bt66, downgrade WORK’s rating from BUY to HOLD. However, in the based on DCF valuation longer term, once WORK is able to fully resume its rating, opportunities to re-rate its share price could arise. Where we differ. As we anticipate a more competitive industry Price Relative going forward, we are now imputing lower revenue growth Bt Relative Index from lower utilisation rates. As the market has a more 105.8 484 95.8 434 aggressive view, our earnings forecast is lower than consensus. 85.8 384 75.8 334 Potential catalysts. WORK’s share price has been mainly driven 65.8 284 55.8 234 45.8 by its strong earnings growth, which can be attributed to its 184 35.8 25.8 134 15.8 84 high TV ratings via the continuous launch of new hit May-14 May-15 May-16 May-17 May-18 programmes. We expect earnings to continuously record new Workpoint Entertainment PCL (LHS) Relative SET (RHS) highs in the coming years, which should act as a key re-rating Forecasts and Valuation catalyst. The robust growth should be driven by i) higher FY Dec (Btm) 2016A 2017A 2018F 2019F average ad rates, and ii) better economies of scale, as c.90% of Revenue 2,634 3,853 4,187 4,657 its cost base is fixed (with low variable costs). EBITDA 917 1,754 1,902 2,104 Pre-tax Profit 255 1,166 1,262 1,483 Valuation: Net Profit 199 904 1,004 1,180 Net Pft (Pre Ex.) 199 904 1,004 1,180 Our TP of Bt66 is based on DCF valuation (WACC of 8.8%). Net Pft Gth (Pre-ex) (%) 21.4 355.2 11.0 17.6 EPS (Bt) 0.48 2.11 2.29 2.69 Key Risks to Our View: EPS Pre Ex. (Bt) 0.48 2.11 2.29 2.69 Fierce competition, audience preference changes, market-share EPS Gth Pre Ex (%) 21 344 8 18 Diluted EPS (Bt) 0.48 2.11 2.29 2.69 expansion of other types of media, and reliance on key staff. Net DPS (Bt) 0.27 1.42 1.49 1.75 BV Per Share (Bt) 7.14 10.4 11.3 12.7 At A Glance PE (X) 126.6 28.5 26.3 22.4 Issued Capital (m shrs) 441 PE Pre Ex. (X) 126.6 28.5 26.3 22.4 Mkt. Cap (Btm/US$m) 26,588 / 833 P/Cash Flow (X) 43.2 18.8 18.3 15.5 Major Shareholders (%) EV/EBITDA (X) 27.0 13.9 13.0 11.5 Phanya Nirunkul (%) 25.91 Net Div Yield (%) 0.4 2.3 2.5 2.9 Prapas Cholsaranon (%) 25.91 P/Book Value (X) 8.4 5.8 5.3 4.7 Net Debt/Equity (X) CASH CASH CASH CASH Nortrust Nominees Ltd. (%) 10.74 ROAE (%) 6.9 24.4 21.3 22.3 Free Float (%) 33.75 Earnings Rev (%): (19) (18) 3m Avg. Daily Val (US$m) 5.8 Consensus EPS (Bt): 2.87 3.45 ICB Industry : Consumer Services / Media Other Broker Recs: B: 14 S: 0 H: 2 Source of all data on this page: Company, DBSVTH, Bloomberg Finance L.P ed: CK / sa: PY, CS Company Guide Workpoint Entertainment PCL WHAT’S NEW Disappointing 1Q18 results WORK posted weak 1Q18 net profit of Bt166m (-4% y-o-y): Downgrade from BUY to HOLD: After the earnings revision, WORK’s 1Q18 earnings were soft and missed both our and our DCF-based TP falls from Bt81 to Bt66. Hence, given the consensus estimates by 38% and 26%, respectively. The fierce competition and sluggish recovery in ratings, we deviation was mainly due to only moderate sales growth of downgrade our BUY call to HOLD call. However, we still 10% y-o-y despite the strong growth in ad rate (+ c.30-40% believe that once the company ramps up its ratings back to y-o-y). We believe the lower-than-expected sales could be the previous level, opportunities to re-rate the share price pressured by the low utilisation rate, causing the overall could arise. utilisation rate to not achieve management’s 2018 target rate of 70%. The soft revenue performed also pulled down its gross margin from 51.3% in 1Q17 to 45.8% in 1Q18. As a result, WORK’s earnings contracted by 4% y-o-y in 1Q18. Cut earnings forecasts to reflect more conservative outlook: We believe the intense competition in the media industry will persist and WORK could take some time to restore its ratings back to the previous level at 1.3-1.4%. Hence, we lower our revenue growth forecast after cutting WORK’s utilisation rate from 70% to 69% in 2018, and by 1% throughout our forecast period. Also, we cut our gross margin from 56.2%/56.7% to 51.3%/51.8% to reflect the lower sales. Quarterly / Interim Income Statement (Btm) FY Dec (Btm) 1Q17 4Q17 1Q18 Chg y-o-y Chg q-o-q Sales 806 769 885 10% 15% Cost of Goods Sold (393) (436) (480) 22% 10% Gross Profit 413 332 405 -2% 22% SGA Expenses (160) (303) (188) 17% -38% Operating profit 253 30 218 -14% 628% Other Income/expense 6 (13) 5 -30% -135% Share profit / loss 2 (4) 0 -89% -105% EBIT 261 13 222 -15% 1582% Interest expense (26) (26) (16) -36% -37% Pretax profit 236 (13) 206 -12% -1700% Income Tax (61) (9) (38) -37% 319% Minority interest (1) (0) (2) 94% 860% Norm. Profit 173 (22) 166 -4% n.m. Extra items 0 0 0 n.m. n.m. Net Profit 173 (22) 166 -4% n.m. Gross Margin 51.3% 43.2% 45.8% SGA/ Sales 19.9% 39.4% 21.2% Operating Margin 31.4% 3.9% 24.6% Net Margin 21.5% -2.9% 18.7% Source of all data: Company, DBSVTH Page 2 Company Guide Workpoint Entertainment PCL Top 3 highest-rating channels CRITICAL DATA POINTS TO WATCH % 4.5 4.0 Critical Factors 3.5 Higher average ad rates from rising ratings and increase in hit 3.0 2.48 2.5 programmes. Normally, WORK sells ad time to agencies under 2.0 2.29 1.338 1.31 1.5 1.08 1.15 1.19 1.16 1.12 packages where rates will be fixed according to agreements. 0.98 1.55 1.03 1.11 1.00 0.85 0.8 0.74 0.78 1.49 1.44 However, in 4Q15, WORK had some hit programmes whose ad time 1.0 1.31 0.5 were sold separately from the standard packages and based on the 0.0 Cost Per Rating Point (CPRP). The ad rates for these programmes (the prime time) ranged from Bt200,000-240,000 per minute. In 2017, WORK Channel 3 Channel 7 there were some additional programmes that were sold separately – “The Mask Singer” “Mic Thongkam Kids” and “I Can See Your 2017 sales breakdown Voice” – due to their solid ratings. We also expect more Events Others programmes such as “SuperMuM” and “Teng-Nong Witthaya” to be marketing 1% 4% sold separately in the future. Given WORK’s high ratings, we forecast its average ad rate per minute to increase from c.Bt76,000 in 2017 to Concerts 5% Bt82,000 in 2018. New programmes coming onstream continuously. To gain higher ratings and audience share, it plans to launch new programmes. The new programmes lined up for 2018 are The Show (music show), The Television programs Rapper (music show), Diva Makeover (variety show), etc. Each 90% programme is expected to gain high ratings (above 4%). Hence, its continuous efforts in launching new programmes to gain higher ratings will allow the company to charge higher ad rates on a Gross margins (%) sustainable basis. As a result, revenue will continue to expand. 60.0 54.8 55.0 51.3 51.8 Benefits from better economies of scale. WORK has c.90% of costs 50.0 as fixed costs and relatively independent of revenue, including 43.2 45.0 42.5 amortisation expenses for its digital TV licence, broadcast rental fees, 38.2 production costs and amortisation expenses for purchased contents.