Media Nusantara Citra, It Is Time To Shine

We upgrade Media Nusantara to BUY (from Neutral) with an IDR2,150 TP (from IDR1,850, 31% upside) on the back of an expected recovery in the local economy in 1H16 an anticipated rate card improvement and lessened discount, given RCTI’s strong audience share. We believe the stock’s valuations are attractive enough, given potential FY16/FY17 earnings growth of 4%/36%.

No more high capex as the studios’ construction is done
Media Nusantara Citra (Media Nusantara) has been able to ramp up the construction of its new studios and also ended its high capex era. In FY16, we estimate for the company to book a higher FCF of IDR1.6trn, which could reduce concerns over its USD250m debt due in FY17. With the completion of the new studios, we expect Media Nusantara to be able to use more in-house productions, which leads to better profitability. We estimate GPMs of 56.4%/57.7% in FY16/FY17 respectively.

RCTI to be the growth driver
As we expect the media sector to recover this year (on domestic consumption recovery starting 1H16), we anticipate Media Nusantara’s advertising (ad) revenue to grow by 8% (FY16) and 11% (FY17). This would be supported by its leading TV station, Rajawali Citra Televisi Indonesia (RCTI), given that audience share and ad revenues have focused on the top two players (RCTI and SCTV), due to their strong and stable audience share.

We have seen that Media Nusantara now has bargaining power in terms of a higher rate card and discounts offered. We forecast for RCTI ad revenue to grow at 14% in FY16. The Euro 2016 tournament ought also to give an additional ad revenue boost.

We upgrade to BUY (from Neutral) with a higher IDR2,150 TP as we believe the market has not priced in the potential recovery of Media Nusantara; we think the company could book better ad revenue growth in FY16 and FY17 (per above). Furthermore, the stock is trading at -1SD and a significant discount to Surya Citra Media (Surya Citra) (SCMA IJ, BUY, TP: IDR3,700), on a 2016F P/E basis, which is greater than the 24% historical average discount to the latter. We also think the share price overhang has been priced in and provides an attractive entry point.

Risks: i) IDR depreciation vs USD – the company has USD250m debt and 20% of content cost is in USD, ii) slower-than-expected domestic economy recovery, and iii) MNCTV’s litigation case.

It Is Time To Show Off
Based on Nielsen data, Media Nusantara’s prime time audience share improved in Nov 2015 while the share of other media groups diminished. The company’s prime time audience share grew 18% MoM to 40.9% during the month under review. It was supported by RCTI, which saw its prime time audience share (+33% MoM) boosted by its new programme line-ups, which included the popular “Anak Jalanan”.

Meanwhile, Media Nusantara’s other TV stations – such as MNCTV – also saw prime time audience shares improving by 2% MoM during the same period. The exception was Global TV, whose prime time audience share dropped by 8% MoM in Nov 2015.

Leading to rate card improvement
As audience share and ad revenues have focused towards the top two players (RCTI and SCTV) in the past few years – due to their strong and stable audience share – we have seen that both stations now have more bargaining power in terms of rate cards and discounts offered. Due to its strong position, we believe Media Nusantara is likely to have an advantage from the recovery in the local economy, as this could lead to a better rate card for RCTI.

We estimate for RCTI ad revenue to grow 14% in FY16 on the back of strong audience share and also the Euro 2016 football tournament. Historically, a football tournament – like the World Cup or the UEFA European Championship – provides additional ad revenue for the company. We saw this in FY12.

The end of high capex ought to provide better FCF
Media Nusantara has been able to ramp up the construction of its new studios and also ended its high capex era. In FY16, we estimate for the company to book a higher FCF of IDR1.6trn. This could reduce the concerns over Media Nusantara’s debt of USD250m, which would be due in FY17. With the completion of the new studios, we expect the company to be able to use more in-house productions, which ought to lead to a better profitability.

More in-house productions to tighten costs
We estimate for Media Nusantara to use more in-house production programmes in FY16 and FY17 after the completion of its new studios. In FY16/FY17, we estimate for GPMs of 56.4% and 57.7% respectively, due to the lower cost of local content.

Valuations look attractive
The valuation of Media Nusantara is cheaper when compared to Surya Citra and this is due to its USD debt and the MNCTV litigation case. Media Nusantara’s debt of USD250m could lead to an estimated unrealised forex loss of IDR450bn in FY16, as the company did not hedge its USD-denominated debt. We are estimating FY16/FY17 earnings growth of 4%/36% YoY respectively.

However, the market has not priced in the potential recovery in ad revenue that could happen during 1H16 and in FY17. The stock has corrected 28% in FY15 on the back of lower ad revenue and IDR depreciation. Currently, Media Nusantara is trading at -1SD and a significant discount to Surya Citra on a P/E basis. This is well below the 24% historical average discount to this rival.

We believe the stock provides an attractive opportunity to entry, given: i) the anticipated recovery in Indonesia’s economy, ii) potential boost from Euro 2016, iii) more in-house productions that could lead to a better profitability, and iv) higher FCF from lower capex.

Valuation
We assume a risk-free rate of 8%, market risk premium of 5%, equity beta of 0.85 and terminal growth rate of 3%, which results in a WACC of 11.3%. We believe that DCF is the most appropriate valuation methodology as it captures the medium- and long-term growth prospects of Media Nusantara.

In our assumptions, we take into consideration the unrealised forex loss of IDR450bn in FY16, as our economist expects a USD/IDR exchange rate of 14,600. Media Nusantara does not have a hedging policy for its USD debt. In our previous assumptions, we did not take into consideration the unrealised forex loss in FY16.