Media Nusantara Citra, Overhang Remains

We reinitiate coverage on Media Nusantara Citra with a NEUTRAL call and DCF-derived TP of IDR2,100 (8% upside, 18.6x/16.0x FY15F/FY16F P/Es). Ad revenue is particularly challenging in FY15 amid economic headwinds, but we estimate that the newly-acquired I-News TV could grow at a 60% CAGR over FY15-18. We expect the group’s revenue to grow 3%/11.1% in FY15/FY16.

Future contribution from I-News TV
We expect Media Nusantara Citra (Media Nusantara) to book muted advertising (ad) revenue growth of 3% YoY in FY15 due to softening ad spend from fast-moving consumer goods (FMCG) companies. However, we expect the newly-acquired SINDO TV – re-branded as I-News TV focusing on news and sports – to generate IDR122bn ad revenue in FY15, which should give a breather to the group. We expect I-News TV to grow at a 60% CAGR from FY15-18.

Audience share improvement
The competition to grab audience share is intensifying from Surya Citra Media (Surya Citra) (SCMA IJ, BUY, TP: IDR3,000) and ANTV, owed by Visi Media Asia (VIVA IJ, NR). Media Nusantara had a weak FY14 performance in terms of audience share, while PT Rajawali Citra Televisi Indonesia (RCTI) lost its audience share in all time and prime time (15.1%/16.8% vs Suria Citra Televisi’s (SCTV) 17.1%/18.6%). However, the company recently refreshed its programming content, resulting in 2%/6% all time and prime time audience share improvements in May 2015.

High USD exposure
Media Nusantara has a USD-linked content cost (USD40m or 20% of content cost) and USD debt exposure from its syndicated loans of USD250m – which will be used to fund the integration of TV studios and modernise broadcasting studios. The IDR has depreciated 7% YTD in FY15, and we do not see any improvement in the near time.

Reinitiating coverage with a NEUTRAL call and IDR2,100 TP (8% upside). Our DCF-based TP is derived from WACC of 10.8% and TG of 3%, implying 18.6x/16.0x FY15F/FY16F P/Es.

Risks:
i) further macroeconomic downturn leading to the softening of ad spend from FMCG companies, ii) a weaker IDR, iii) loss of Media Nusantara Citra TV (MNCTV), and iv) fierce competition for audience share.

Investment Thesis
Doubtful of ad spend recovery in near term. In our view, ad spend is highly related to consumer demand. Looking forward, we think ad spend could be impacted by several macroeconomic issues:

Economic slowdown – GDP still not going back to 6%
We estimate FY15-16 GDP growth of 5-5.5% and some recovery in FY17.
The economic slowdown is stemming from delays in government spending and a softening in commodity exports and consumer spending.

Concern over USD/IDR outlook
The IDR has depreciated 7% YTD in FY15, and we do not see any improvement in the near time. We believe further IDR depreciation could further reduce margins.
Fuel price hike

Ad revenue challenge in FY15F
Ad revenue is set to be challenging in FY15F amid Indonesia’s economic headwinds, with most FMCG companies having reduced their advertising expenses. We forecast Media Nusantara to post muted ad revenue growth of 3% in FY15 and 11.1% growth in FY16. For FY15/FY16, we expect RCTI to grow 3.9%/8.6%, MNCTV to grow -4%/10.5%, and Global TV to grow 5%/4%. However, we expect the newly-acquired SINDO TV to generate ad revenue of IDR122bn/IDR270bn in FY15/FY16 respectively, with a 60% CAGR from FY15-18.

Muted revenue growth from pay-TV ad spend
Media Nusantara sells most of its contents (>90%) to its subsidiary, MNC Sky Vision (MSKY), through its 19 MNC channels. It has mainly local contents which are preferred by Indonesian audience. The programmes cover a wide range of genres including sports, drama, comedy and health. Currently, the advertising rate card for MNC channels is at USD60 per 30 seconds.

However, we do not expect potential revenue growth from pay-TV as we are negative on the number of pay-TV subscribers. Furthermore, we do not see a rate card increase for this segment due to the subdued number of subscribers on MSKY, as we believe there is a correlation between the rate card and number of pay-TV subscribers. We estimate content revenue to grow 10% in FY15 (from an average of 20% in the previous year).

Potential loss in MNCTV litigation case
Currently, Media Nusantara owns 75% of MNCTV, which contributed 27% of its FY14 revenue. We create two scenarios to assess the impact on Media Nusantara, should it lose MNCTV.
Scenario 1: Media Nusantara loses MNCTV (does not keep the content)
Scenario 2: Media Nusantara loses MNCTV (keeps the content and moves it into I-News TV)

In Scenario 1, we estimate FY15 revenue to decline by 27% (MNCTV’s revenue contribution in FY14) – as we estimate MNCTV to contribute the same proportion of revenue in FY15. We expect FY15/FY16 revenue to drop to IDR4.9trn/IDR5.5trn from IDR6.8trn/IDR7.5trn, respectively, while EPS to drop 35% YoY to IDR80.90 in FY15. We expect the share price to decline to IDR1,550, assuming other things remain constant.

In Scenario 2, we assume that Media Nusantara loses MNCTV and moves the content to I-News TV. In this scenario, we expect FY15/FY16 revenue to drop to IDR6.7trn/IDR7.3trn from IDR6.8trn/IDR7.5trn, respectively, while EPS to fall 11% YoY to IDR111 in FY15. We estimate the share price to fall to IDR1,800, assuming other things remain constant.

Reinitiate coverage with NEUTRAL call (8% upside from current price). We reinitiate coverage on Media Nusantara with a NEUTRAL call based on our view that:
1. FY15F ad revenue growth is set to be challenging amid Indonesia’s economic headwinds
2. Revenue contribution from I-News TV is still low and we estimate bigger contribution in the next few years. Currently, I-News TV does not have a high audience share and rating, but we believe the company could increase the rate card once it has better audience share and rating.
3. We do not like Media Nusantara’s USD/IDR exposure. Currently, its cost of content is USD-linked (USD40m) and it has USD250m syndicated loans. The IDR has depreciated 7% YTD in FY15. If the IDR depreciates further, this could lead to margin pressure.
4. A potential loss of MNCTV still haunts the share price.

Currently, the stock is trading at 17.2x FY15F P/E, 2x discount to Surya Citra’s FY15F P/E of 24.0x currently and similar to that of its regional peers. Given its high FY15F/FY16F ROEs of 20.5%/21.6% (similar to that of its regional peers eg Sun TV and TV18 but lower than Surya Citra’s), we believe Media Nusantara’s valuation is attractive. However, share price overhangs come from USD/IDR headwinds and the MNCTV litigation case. We expect potential significant upside from the current P/E, if the company attains a positive outcome from the MNCTV litigation case and improves its audience share, especially for Global TV and MNCTV.

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 result in a WACC of 10.8%. We believe that DCF is the most appropriate valuation methodology as it captures the medium- and long-term growth prospects of Media Nusantara.

Risks
Slower advertising and promotion (A&P) spending from FMCG companies. FMCG companies contributed 70% of media companies’ revenue. Given Indonesia’s economic slowdown, FMCG corporates may reduce or cut their A&P spending, leading to lower ad spending growth.

Weaker IDR
Media companies have some exposure to USD/IDR fluctuation through their content purchases, as some media companies still import content from overseas. Thus, a further weakening of the IDR could increase programming costs and hurt margins. Currently, 20% of Media Nusantara’s content cost is USD-linked (from foreign content), while its USD-denominated debt amounts to USD250m.

Stiff audience share competition
Competition in terms of audience share is very intense. A loss of audience share could reduce the company’s bargaining power on rate card and possibly force it to offer more discounts, which would in turn lower its revenue.

MNCTV litigation case
MNCTV contributed 27% of FY14 revenue. If Media Nusantara loses MNCTV, this could have a negative impact on its financial performance.

Intense Battle Among Media Companies For Audience Share

Highly dependent on RCTI
In terms of audience share, Media Nusantara is considered one of the top media players in Indonesia, especially in prime time with 35% audience share (from RCTI, MNCTV and Global TV) (vs Surya Citra’s 34.8%) as of May 2015. The strong performance in audience share is driven by RCTI (17.9%), thanks to its popular TV drama series during prime time. The high audience share could translate into high rating points for content – which is cost efficient for advertisers.

Four of RCTI’s prime time dramas, such as “Tukang Bubur Naik Haji”, “7 Manusia Harimau”, “Aku Anak Indonesia”, and “Preman Pensiun 2”, were among the top 10 programmes in Jun 2015. Meanwhile, MNCTV and Global TV, which contribute less audience share, have been able to maintain their audience share.

Competition from Surya Citra
Since May 2014, RCTI has been losing prime time audience share to Surya Citra’s FTA TV stations – Suria Citra Televisi (SCTV) and PT Indosiar Visual Mandiri (Indosiar). This was due to SCTV’s popular drama series “Ganteng Ganteng Serigala” in FY14, which was well-accepted by viewers. While RCTI followed the move with its “7 Manusia Harimau” drama, it has failed to catch up with SCTV’s audience share in FY14.

Furthermore, the D’Academy show on Indosiar was a huge success and boosted Indosiar’s audience share up to 23% in Mar 2014 and 22.5% in Apr 2015 (from Jan 2014/Jan 2015). Even so, we think the loss of audience share is likely only to have a small impact on RCTI, as we believe RCTI’s prime time dramas still hold quite high rating points. Nevertheless, we expect some discount on RCTI’s rate card, as a possible response.

Bounce-back plan for RCTI
Five of Media Nusantara’s programmes were included in top 10 programmes in Jun 2015 (Figure 123). RCTI has started to air drama series like “Preman Pensiun 2”, “Kultum” and “Sakinah Bersamamu” – the latter two are religious dramas for the Ramadhan season. The new drama series seems to draw a positive response from viewers, which has helped increase RCTI’s audience share and rating. The new Ramadhan drama series increased RCTI’s prime time audience share to 19.6% in Jun 2015 from 17.9% in May 2015.

RCTI’s dramas during the Ramadhan season tend to attract high number of viewers, which was reflected in a high audience share in Jul 2015. Furthermore, as of end-Jun 2015, “Kultum” ranked second with 4.6 rating points, while seven of Media Nusantara’s programmes were among the top 10 programmes as of 30 Jun 2015 (based on daily ratings from Nielsen).

Acquisition of SINDO TV (re-branded as I-News TV)
SINDO TV has now officially become Media Nusantara’s fourth FTA TV network after RCTI, Global TV and MNCTV. SINDO TV has a national broadcasting licence and is heavily focused on news and secondary infotainment and sports. We expect low average prime time and non-prime time rate cards, as the channel is still new and has not achieved a high audience share and rating point. We estimate that SINDO TV may contribute 2% to Media Nusantara’s FY15 revenue.

MNC Channels Under Pressure From Declining Growth In MSKY
Muted revenue growth in pay-TV ad spend. Media Nusantara sells most of its content (>90%) to its subsidiary, MNC Sky Vision (MSKY IJ, SELL, TP: IDR1,100), through its 19 MNC channels. It has mainly local content, which is what the Indonesian audience prefers. The programmes cover a wide range of genres including sports, drama, comedy and health. Currently, the advertising rate card for MNC channels is at USD60 per 30 seconds.

However, we do not expect potential pay-TV ad revenue growth, since we are negative on the number of subscribers on pay-TV. Furthermore, we do not see an increase in rate card for this segment due to the subdued number of subscribers on MSKY – as we believe there is a correlation between the rate card and number of pay-TV subscribers. We estimate content revenue to grow 10% in FY15.

TPI Case Still Haunts Media Nusantara’s Share Price
Background of the case. Televisi Pendidikan Indonesia (TPI) was in heavy debt post the 1998 crisis and President Soeharto’s downfall. Media Nusantara’s owner, Hary Tanoedoedibjo lent USD53m to TPI and believed he had the right to convert the debt into equity. In 2011, Siti Hardiyanti Rukmana (aka Tutut), the previous owner of TPI, challenged the legality of the equity conversion and the case has been ongoing ever since.

However, Media Nusantara’s 75% stake in MNCTV (previously TPI) has never been questioned. This case is between Tutut and PT Berkah Karya Bersama (PT Berkah) (affiliated with Hary Tanoesodibjo), and what is being disputed is PT Berkah’s ownership of MNCTV. Media Nusantara had acquired a 75% stake in MNCTV back in 2006.

Our assumption scenarios for MNCTV case
In the worst-case scenario, MNCTV could be taken away from Media Nusantara. However, we believe that both parties could settle the legal case outside the courts, with Media Nusantara buying the minority stake at a premium. Yet, we have created two scenarios in the event of Media Nusantara losing the legal case and its potential impact on the company’s valuation:
Scenario 1 = Media Nusantara loses MNCTV (does not keep the content)
Scenario 2 = Media Nusantara loses MNCTV (keeps content and moves it into I-News TV)

Loss of MNCTV could hammer Media Nusantara’s earnings
Currently, Media Nusantara owns 75% of MNCTV and as of FY14, the latter contributed 27% of Media Nusantara’s total revenue. We analyse the impact of losing MNCTV to our valuation.

In Scenario 1, we expect FY15 revenue to decline by 27% (MNCTV’s revenue contribution in FY14) – as we estimate that MNCTV would contribute the same proportion of revenue in FY15. We expect Media Nusantara’s FY15/FY16 revenue to drop to IDR4.9trn/IDR5.5trn from IDR6.8trn/IDR7.5trn, respectively. Meanwhile, EPS will likely drop 35% YoY to IDR80.90 in FY15. The target price will likely drop to IDR1,550, based on our estimate. All in, we assume other things remain constant.

In Scenario 2, we assume that Media Nusantara loses MNCTV and moves the content to I-News TV. In this scenario, FY15/FY16 revenue should drop to IDR6.7trn/IDR7.3trn from IDR6.8trn/IDR7.5trn, respectively. Meanwhile, EPS will likely drop 11% YoY to IDR111 in FY15. The target price could fall to IDR1,800, based on our estimate (Figure 26). All in, we assume other things remain constant.

Better-positioned now but uncertainty lingers
In Dec 2014, the Indonesian National Board of Arbitration (BANI) ruled against Tutut in the ownership dispute of FTA TV broadcaster MNCTV. It ruled in favour of PT Berkah, which has 75% ownership of the asset. The Arbitration Board has also ordered Tutut to pay IDR510bn to PT Berkah. We believe this is a positive for Media Nusantara, as it will likely not lose MNCTV (which contributes 27% of revenue). However, until the case is over, we believe the case could remain an overhang on the share price.

Scenario Analysis
Base-case scenario
Our TP of IDR2,100 is based on the following base-case assumptions for ad spend (revenue). In our base-case scenario, we estimate 5% GDP growth for 2015 with a GDP multiplier of 0.9x, since we believe there is a correlation between ad spend growth and GDP. We give a discount to Media Nusantara’s ad revenue growth due to unbalanced strength among its FTA stations (RCTI is the growth driver in terms of audience share, as MNCTV and Global TV’s audience share is low). We expect content revenue growth to decline 10% in FY15 (from 20% in FY14), due to the subdued number of subscribers on MSKY. We estimate Media Nusantara’s revenue to grow 3%/11% in FY15/FY16 respectively.

Bull-case scenario
In our bull-case scenario, we assume 6% GDP growth for 2015 with a 2.0x GDP multiplier. Under this scenario, we assume that infrastructure projects will be realised in the next two quarters of FY15, the USD/IDR exchange rate will recover, and commodity prices will improve. We forecast Media Nusantara’s revenue to grow 12%/16% in FY15/FY16 respectively, assuming other things remain constant.

Bear-case scenario
In our bear-case scenario, we assume 2015 GDP growth of 4% with a 0.6x GDP multiplier. In our bear-case scenario, we assume a further decline in the USD/IDR and slower consumer spending (higher interest rate and fuel prices). We forecast Media Nusantara’s revenue to grow 0%/18% in FY15/FY16 respectively, assuming other things remain constant.

Revenue and gross margin
Historically, Media Nusantara had a revenue CAGR of 11% from FY09-14. Revenue growth dropped significantly in FY09 due to Indonesia’s economic crisis but surged 24% YoY in FY10 and 16% YoY in FY12, bolstered by sporting events such as World Cup 2010 and Euro Cup 2012. In FY13 and FY14, revenue grew less than 10% due to headwinds in the Indonesian economy. For FY15/FY16/FY17, we estimate revenue of IDR6.8trn/IDR7.6trn/IDR8.5trn respectively, implying 8% CAGR from FY14-FY17.

Meanwhile, we forecast GPM of 56.1%/56.2%/57% on the back of a weakening IDR (20% of content cost is USD-linked). Moreover, we expect outsourced content (20% of all content) to decline in the coming years, as the company has trying to use more in-house production.

Net profit and net margin
We estimate FY15/FY16/FY17 net profit at IDR1.6trn/IDR1.8trn/IDR2.1trn, respectively. We expect FY15 net profit to decline 8% YoY, weighed by USD-linked content cost and higher interest expense. Meanwhile, we forecast net margin of 24%/25%/25% in FY15/FY16/FY17, respectively.

Balance sheet
As of FY14, Media Nusantara was still in a net cash position of IDR1.1trn, with gearing (debt/equity) of 35%. We estimate that the company may spend IDR935bn in capex in FY15 for programme maintanance and building new studios and offices. In FY14, Media Nusantara secured USD250m syndicated loans for capex and working capital with an interest rate pa of 3.5% plus 3-month London Interbank Offered Rate (Libor).

Company Background
History of Media Nusantara
PT Media Nusantara Citra (Media Nusantara) was established on 17 Jun 1997 and has been listed on the Indonesian Stock Exchange (IDX) since 22 Jun 2007. The company operates three out of Indonesia’s 10 FTA TV stations and has additional core businesses in television content production and delivery. Its three FTA stations are RCTI, MNCTV (previously known as TPI), and Global TV. Furthermore, the company also owns radio, print media, talent management, and TV production companies.