Media Nusantara Citra Margin Boost From Integrated TV Studios

We think Media Nusantara is still attractive, given better margins from cost savings after the completion of its new studios and potentially higher dividends in FY17F. We expect the company to report strong 2Q16 results on the back of resilient audience share, Euro 2016, and the Ramadhan season. Maintain BUY with a higher TP of IDR2,500 (from IDR2,300, 11% upside), which implies 21.2x/18.6x FY16F-17F P/Es. The stock is currently trading at 19x FY16F P/E.

Margin mprovements from integrated TV studios
With the completion of its new studios – which should increase production capacity and cost efficiency – we expect Media Nusantara Citra (Media Nusantara) to be able to utilise its house production more, leading to better profitability. We estimate GPMs of 56.4%/57.7% in FY16F-17F respectively (from 55.6% in FY15). Direct cost related to the content of programmes should remain flattish in FY16F, offset by costs from its new i-News TV channels.

Rajawali Citra Televisi Indonesia’s (RCTI) strong audience share performance likely to continue. Media Nusantara’s prime time audience share was at 45.9% (+3.4% MoM) in Apr 2016, bolstered by its hit programme “Anak Jalanan”. In our view, the success of the programme could translate into a higher rate card. We expect the company to maintain strong audience share until end-FY16.

Positive catalyst from MNCTV litigation case
In the past, there had been a trading discount to Media Nusantara’s share price due to the dispute over MNCTV ownership between PT Berkah Karya Bersama and the previous owner, Siti Hardiyanti Rukmana. However, in Apr 2016, the Supreme Court denied the request by Siti Hardiyanti Rukmana for a judicial review. Based on the latest decision, MNCTV is no longer disputable by any party. In our view, this is a positive as it removes the overhang in the share price.

Maintain BUY with a higher TP of IDR2,500 (from IDR2,300, 11% upside). We remain positive on the counter on the back of:
i. Margin mprovements from its integrated TV studios;
ii. Management’s priority to pay down its USD debt at end-FY16, which would reduce earnings volatility from forex gains/losses;
iii. The possibility of higher dividends in FY17 from higher FCF.

Key risks are:
i. IDR depreciation against the USD – as the company has USD250m debt which will mature in FY17;
ii. A slower-than-expected domestic economic recovery.

Expect Strong 2Q16 Results
Euro 2016 and Ramadhan season to boost RCTI’s advertising revenue
More prime time, more advertising (ad) revenue
Indonesians are big fans of football competition, especially Euro and World Cup. The recently-concluded Euro 2016 had attracted a large number of viewers. As most of the matches started from 8pm, 11pm or 2am (all exclusively aired by Media Nusantara’s RCTI TV station), this had extended the prime time hours to after 2am from 6-11pm previously. Based on data from Adstensity, the gross rate card for Euro 2016 was between IDR85m and IDR125m per 30 seconds. This higher rate card could translate into better ad revenue for Media Nusantara in 2Q16.

Improved spending pattern in Ramadhan season
During the Ramadhan season, consumer spending on food and beverage (F&B) and clothing increased rapidly. Several categories that would have enjoyed strong growth would be assorted biscuits, soft drinks and syrup. Apart from that, Indonesian employees typically have an extra 1-month bonus to spend during the festive month. To capitalise on consumers’ stronger propensity to spend, most consumer goods companies ramp up their TV advertising to increase sales volume. Hence, an improvement in consumer spending is usually correlated with higher ad revenue in the media industry.

Media operators benefit from Ramadhan season
Based on Nielsen, during the festive month, consumers do not only change their spending behaviour but also the way they consume media, especially TV. According to Nielsen, people watch more TV during Ramadhan compared to other time periods. There are several explanations for this trend. First, consumers prefer to stay at home and watch religious TV programmes during Ramadhan.

Second, school holidays during this period usually lead to improved viewerships from viewers aged 5-14 years old. Furthermore, the Ramadhan season also features a new prime time that takes place during the morning meal from 2am-5am.

Expect a strong performance in 2Q16
We expect Media Nusantara to report a strong 2Q16 topline of IDR1.95-2.0trn on the back of a strong audience share number in the past few months, Euro 2016, and the Ramadhan season. We expect 2Q16 earnings of IDR470-500bn, driven by higher margins from lower direct cost after the completion of its new studios.

Dramas To Drive 2H16 Performance
Anak Jalanan remains the top programme in Apr 2016
Resilient audience share. Up to Apr 2016, Media Nusantara had been able to maintain strong prime time audience share at 45.9% (+3.4% MoM), driven by strong programmes like Anak Jalanan and Tukang Bubur Naik Haji. Drama series like Anak Jalanan have been dominating the prime time market share since end-2015.

We believe the strong viewership could be maintained until end-2016. According to Nielsen, Anak Jalanan drama series was the most watched programme among children (5-9 years old), teens (15-19 years old) and housewives in 1Q16.

Valuation remains attractive
Currently trading at 19x FY16F P/E. Given the removal of share price overhang from the finalisation of the MNCTV litigation case as well as the company’s plan to pay its USD debt by end-FY16, we think that Media Nusantara’s current valuation of 19x FY16F P/E remains attractive compared to those of its peers.

We think the stock has a potential 11% upside from the current price, in view of:
i. Its integrated TV studios that could improve margins – which we believe would be fully realised in FY17F;
ii. The possibility of a higher dividend payout ratio in FY17F from higher FCF;
iii. RCTI’s strong audience share performance, which could lead to higher bargaining power in the rate card.

Valuation basis
Our WACC assumptions
We lower our assumptions on cost of debt to 10% from 11.5%, resulting in a lower WACC of 10.8% from 11.3% previously.We maintain our assumptions ie a risk-free rate of 8%, a market risk premium of 5%, equity beta of 0.9 and a terminal growth rate of 3%. We believe that DCF is the most appropriate valuation methodology as it captures Media Nusantara’s medium- and long-term growth prospects.