MNC Sky Vision, Looking For a Silver Lining
We initiate coverage on MNC Sky Vision with a SELL and DCF-derived IDR1,100 TP, implying 11.5x/10.7x FY15F/FY16F EV/EBITDA. FY14 performance has been poor as subs growth has been muted (2.5m subs). We expect only 4.0% additional subs growth in FY15 on domestic economic headwinds, piracy and a clean-up of subs. We see competition remaining fierce and pressuring ARPU, and we are negative on the pay-TV industry.
Slowdown in subscribers (subs) growth
MNC Sky Vision’s performance slowed down in FY14, as subs grew by only 10.0% YoY that year (FY13: +34.0% YoY growth). This was attributed to some hiccups like the slowdown in the economy, piracy and clean-up sales. We expect a muted growth in FY15 and forecast for 4.0% YoY growth in additional subs to a total of 2.62m this year.
ARPU under pressure
We believe competition in the pay-TV arena remains fierce and most of the new entrants would be fighting for additional subs numbers by giving out promotion or cheaper ARPU. Due to these reasons, MNC Sky Vision’s ARPU has declined by 8.0% from FY11 to FY14. We estimate for ARPU to stay flat in FY15 at IDR102,000.
High exposure to USD
MNC Sky Vision has a high exposure to the USD from its capex (100.0% USD), content costs and USD debt. While, its revenues are denominated in IDR, the Indonesian currency has depreciated 7.0% YTD in FY15 and we do not see any improvement in the near term. We believe the further depreciation of the IDR would further reduce margins.
Initiating coverage on MNC Sky Vision with a SELL call and IDR1,100 TP (31.0% downside)
In our view, the intensifying competition in the pay-TV space is likely to pressure its ARPU. The company also has no content premium over free-to-air (FTA) and has high exposure to the USD. Our DCF-based TP is derived using WACC of 10.0% and TG of 3.0%, implying 11.5x/10.7x FY15F/FY16F EV/EBITDA respectively.
Risks
An increase in the number of competitors by new entrants like the Lippo Group’s Big TV, could lead to slower additional subs and ARPU. Further depreciation of the IDR is also another risk.
Investment Thesis
Riding on the Indonesian middle income group and the low penetration rate
Based on MPA Research’s data, Indonesia offers great potential for the pay-TV industry, given its low penetration rate of 11.0% in FY14 and a rising domestic consumer class. In terms of pay-TV’s penetration rate in the country, Indonesia is considered the lowest in the Asia-Pacific region when compared to the Philippines (14.0%), Thailand (28.0%) and Malaysia (55.0%).
We believe Indonesian households with monthly expenditure of above IDR3m can afford pay-TV. This is because the ARPU of MNC Sky Vision’s Indovision is IDR101,000 (3.0% of expenditure) while First Media’s (KBLV IJ, NR) ARPU is IDR 178,000 (6.0% of expenditure). In addition, we believe households with a monthly expenditure of IDR1.5m could also subscribe to Indovision’s cheaper packages or look at its Top TV offerings that cater to the lower consumer segment.
Boston Consulting Group (BCG) forecasts that the number of Indonesian households with monthly expenditure of more than IDR3m would increase to 73m by FY20 from 32m in FY12. The rise of the Indonesian middle class could increase the number of subs for the pay-TV industry in the future.
Bumpy road for the pay-TV business. However, we are negative overall on the pay-TV segment as we believe that:
i. The deceleration of the Indonesian economy is likely to impact pay-TV subs.
ii. Pay-TV packages are not attractive enough to draw in the mass market.
iii. ARPU has actually fallen due to the rise in competition.
iv. The USD/IDR depreciation could further hurt pay-TV business performance as 100.0% of capex is in USD.
v. LTE might pose a threat to pay-TV services.
Negative on the pay-TV industry
Despite the future growth of the Indonesian middle income segment and the low-penetration rate of pay-TV currently, we are negative on the industry going forward. This is because we see no premium differences between FTA and pay-TV channels. We think that pay-TV packages are not attractive enough to draw the mass market. Furthermore, we are cautious over MNC Sky Vision’s high level of USD exposure, given that 100.0% of capex is denominated in the greenback.
Initiating coverage on the stock with a SELL call, 31.0% downside from the current price. We initiate coverage on MNC Sky Vision with a SELL call based on the following reasons:
i. We expect near-term subs growth to remain moderate due to the softening consumption environment and rising piracy.
ii. We continue to believe ARPU would be under pressure given the soft purchasing power and the increase in the number of promotions due to increasing competition. From FY11 to FY14, ARPU was down 8.0% to IDR102,000.
iii. High exposure to USD – we see the depreciation of the IDR pressuring margins, given that 100.0% of MNC Sky Vision’s capex and content costs are in USD.
Valuation
We employ a mix of DCF and target EV/EBITDA to value the stock. We assume a risk free rate of 8.0%, market risk premium of 5.0%, equity beta of 0.90 and TG rate of 3.0%, which results in a WACC of 10.0%. From this we obtain a TP of IDR1,100 per share.
We value MNC Sky Vision based on EV/EBITDA multiples over P/E, because at this stage, the company’s earnings are depressed. This is because of the high depreciation from rapid set-top box (STB) deployment and not fully reflecting in the earnings potential of its business. At our TP of IDR1,100, the stock would be trading at FY15F/FY16F EV/EBITDA of 11.5x/10.7x respectively. The valuation is close to the regional average EV/EBITDA of 9.6x/8.7x in FY15F/FY16F respectively. Based on this, we believe our TP multiples are reasonable.
Valuation
We assume a risk free rate of 8.0%, market risk premium of 5.0%, equity beta of 0.90, TG rate of 3.0%, which results in a WACC of 10.0%. We believe that DCF is the most appropriate valuation methodology, because it captures the medium- and long-term growth prospects of MNC Sky Vision.
Risks
We view these as the key risks surrounding MNC Sky Vision:
High exposure to the USD. The company has significant capex and debt denominated in USD. At the same time, its revenue is largely IDR-denominated.
New players in the market
While MNC Sky Vision currently dominates the Indonesian pay-TV market, there have been a significant number of new entrants into this segment. These include Big TV, which is owned by the Lippo Group. We opine that the more new entrants come into the market, the more MNC Sky Vision’s market share and ARPU are hurt.
Stern Competition – Deteriorating Subs Growth And ARPU
Highest market share in the industry. Despite the higher competition in the pay-TV industry, MNC Sky Vision has been able to maintain its market share in FY14, according to data compiled by Media Partner Asia. The company had managed to increase its market share to 75.0% in FY14 from 74.0% in FY13 and we believe its dominant position in the pay-TV industry is likely to continue in the future, based on:
i. MNC Sky Vision’s strong brand name in every level of household income. Currently, the company operates under three brand names: i) Indovision, ii) OkeVision, and iii) Top TV. The three different brands are used to cater the various income level needs. Indovision caters to the upper income level, Top TV caters to first-time subs from the lower middle income class while OkeVision is gaining popularity among the middle class.
ii. Large, diversified, in-house distribution network. MNC Sky Vision has over 100 branches office across Indonesia.
Decelerating Indonesian economy
In 1Q15, Indonesia’s GDP growth contracted to 4.71%, and we think that the FY15F GDP is likely to stay at 5.0%. As a result, consumer spending – which has been a driver of economic expansion – is showing signs of softening due to the weaker IDR, high interest rates and inflation on the back of increased fuel prices.
Impact of the Indonesian economy on subs growth
We believe the increase in fuel prices would likely – on average – leave households with less disposable income. The impact of this would likely be clustered around higher income households, who are more likely to own vehicles and spend a greater absolute sum of fuel. Poorer households, however, would still be affected through increases in expenses that they are charged for energy services as well as any rise in the cost of non-energy goods and services. Such an increase in fuel prices would then impact consumers’ purchasing power, which is likely to have an effect on pay-TV subs growth.
Who are the competitors?
MNC Sky Vision’s competition comes from TelkomVision (TLKM IJ, BUY; IDR3,600), PT Trans Corp’s Transvision, PT Karyamegah Adijaya Aora, First Media and Sinar Mas Group’s Orange TV. Despite the intense competition from other players, the company has been able to maintain its market share. MNC Sky Vision believes that Aora and Orange TV have suffered losses due to lower subs growth and ARPU in trying to compete with the company.
At the same time, First Media is focusing more on broadband (high-speed internet) and the company thinks that First Media is not a direct competitor. And, while Big TV has managed to add to its number of subs, these subs are paying less due to promotions being offered.
High competition in product offerings
We understand that the pricing competition between the pay-TV operators is very intense, especially in the middle- to low-income markets. In order to attract more subs, the operators have been offering very interesting packages and discounts. With a relatively similar quality of service, we believe pricing is the most important factor in deciding which pay-TV operator new subs select.
MNC Sky Vision’s ARPU is deteriorating due to competition and slow subs growth
MNC Sky Vision’s performance has slowed down in FY14, as subs only grew by 10.0% YoY in FY14 vs 34.0% YoY subs growth in FY13. It was due to some hiccups like the slowdown in the economy, piracy and clean-up sales. We expect muted growth in FY15 and forecast for 4.0% YoY in additional subs for a total of 2.62m subs this year. We estimate for ARPU to stay flat in FY15 at IDR102,000 while, in FY16, it is likely to drop by another 0.7% to IDR101,000 due to fierce competition.
New channels and services
In FY14, MNC Sky Vision launched a new, exclusive technology-based service called Indovision Anywhere. This new service, a first for the company, allows subs to access all of MNC Sky Vision’s channels through various mobile devices and gadgets anywhere and at any time.
Furthermore, the company has also introduced new channels, namely ZooMoo, Hits, WakuWaku Japan, MNC Home & Living, MNC and MNC Health & Beauty. This brings its current total number of channels to 141. This new service and channels could help MNC Sky Vision to have a better advantage vis-à-vis its peers, and we expect the new channels and the Indovision Anywhere service could improve the number of subs in FY15 and FY16. We expect subs growth of 4.0%/8.0% in FY15/FY16 respectively.
Focus on in-house distribution
According to management, MNC Sky Vision would focus on being price competitive against its competitors and expand its in-house distribution network. The company used to rely on third party distributors, but is now looking into more in-house distribution. MNC Sky Vision said it was reducing the number of new subs from outsourced or third-party distributors as the latter charged around USD6 per number of new subs.
In FY14, the company managed to source 82.0% of new subs from in house distributions. We expect some margins improvement after the company successfully depends on in-house distributors fully and estimate for EBITDA margins of 36.6%/37.1% in FY15F/FY16F respectively.
Financial Highlights
Revenue and gross margins
In recent years, MNC Sky Vision has posted stable and strong revenue growth (FY12: 38%, FY13: 26%). In FY14, however, topline growth slumped to just 9.0% YoY. This was a challenging year for the company due to increased competition, which led to slower additional subs growth and lower ARPU. Furthermore, illegal pay TV operators are growing rapidly in Indonesia.
We estimate for revenue growth this year to be slower than in FY14 due to the aforementioned reasons, worsened by the slowdown in Indonesia’s economy. We expect MNC Sky Vision’s revenue to grow at 4.0%/7.5% in FY15/FY16 respectively. Meanwhile, we forecast GPM of 9.4%/9.8% in FY15/FY16 respectively.
Net profit and net margins
We forecast for MNC Sky Vision to still be in a IDR35bn net loss position in FY15 due to the company’s higher interest expenses (we assume IDR226bn in FY15). Based on our estimation, we expect MNC Sky Vision’s net profit to be in positive territory in FY16, at IDR25bn, because we think the number of subs is set to improve next year, due to its new channels and services like Indovision Anywhere.
Shaky balance sheet
As at FY14, MNC Sky Vision remained in a net cash position of IDR65bn, with gearing (debt/equity) of 185.0%. We estimate for the company to spend IDR1.1trn to change the MPEG-2 STBs with MEPG-4 STBs and maintenance capex. We estimate for gearing to increase to 204.0% in FY15 due to the company’s low cash position and higher debt. We estimate for MNC Sky Vision to withdraw another IDR150bn to finance its expansion.
Company Background
History of MNC Sky Vision
MNC Sky Vision provides satellite-based pay-TV services in Indonesia. Currently, the company distributes approximately 141 local and international channels in various segments, such as sports, news, movies, knowledge, kids, religion, entertainment, hobbies/special interests and others. It provides its services under three brand names, Indovision, OkeVision and Top TV.
As of FY14, the company had approximately 2.5m subs. It serves direct-to-home (DTH) subs. It also serves commercial subs, which include apartment complexes, real estate, housing estates, and oil & gas companies, as well as hotels and hospitals.
