MNC Sky Vision Looking for Silver Lining
We initiate coverage of MNC Sky Vision (MSKY) with a SELL call and a DCF derived TP of IDR1,100, implying 9.9x/8.9x FY15F/FY16F EV/EBITDA. MSKY’s performance has been poor in FY14 as subcribers growth has been muted at 2.5mn subs; and we expect only 4% additional subscribers growth in FY15F due to Indonesia economy headwinds, piracy, and clean up of subscribers. We see competition remain fierce – pressure ARPU; we are negative on the pay TV industry.
Slowdown in subscribers growth
MSKY’s performance has slowed down in FY14, as subscribers only grew by 10% YoY in FY14 vs. 34% YoY subscribers growth in FY13. It was due to some hiccups like slowdown in economy, piracy, and clean up sales; we expect a muted growth in FY15F and we forecast 4% YoY additional subscribers to a total of 2.62mn subscribers in FY15F.
ARPU under pressure
We believe competitions in pay TV industry remain fierce and most of the new entrants will fight for additional number of subcribers by giving promotion or cheaper ARPU. Due to this reasons, MSKY’s ARPU has declined by 8% from FY11 to FY14. We estimate the ARPU will stay flat in FY15F at IDR102k.
High exposure to USD
MSKY has a high exposure to USD from their capex (100% USD), content cost, and USD debt. While, its revenue are denominated in Rupiah. Currently, Indonesian Rupiah has depreciated 7% YTD in FY15F and we do not see any improvement in the near time. We believe the further Rupiah depreciation will further reduce the margin.
Initiating coverage with a SELL call and TP of IDR1,100 (a 21% downside)
In our view, the intensifying competition in pay TV space will pressurised MSKY’s ARPU, no content premium over FTA, and high exposure to USD. Our DCF based TP is derived using WACC of 10.2% and a TG of 3%, implying a 10.6x/9.9x FY15F/FY16F EV/EBITDA.
Risks
Increase in competitors by new entrants like Big TV – could lead to slower additional subscribers and ARPU, further Indonesian Rupiah depreciation.
Investment Thesis
Riding on Indonesian middle income and low penetration
Indonesia offers a great potential to the pay TV industry due to low penetration of 11% in FY14 (based on MPA), and rising Indonesia consuming class. In terms of penetration rate of pay TV, Indonesia is considered as the lowest in Asia Pacific compare to Phillipines (14%), Thailand (28%), Malaysia (55%).
We believe Indonesian households monthly expenditure above IDR3m can afford pay TV as Indovision ARPU of IDR 101k (3% of their expenditure) and First Media ARPU of IDR 178k (6% of their expenditure) could manage to subscribe pay TV. In addition, we believe with the monthly expenditure of IDR1.5m – they could also subscribe to Indovision cheaper packages (Top TV – for lower consumers segment). BCG forecast that Indonesians with monthly expenditure of more than IDR3m will increase to 73m households (vs. 32m households in FY12) by FY20F. The rise of Indonesia middle class could increase the number of subscribers for pay TV industry in the future.
Bumpy road for pay TV business
However, we are overall NEGATIVE on pay TV as we believe:
1. Decelerate in Indonesia economy condition will impact in the pay TV subs
2. Pay TV packages are not attractive enough to draw mass market
3. ARPU has actually fallen due to rise of competition
4. USD/IDR depreciation could further hurt pay TV business performance – 100% capex are in USD
5. LTE might pose a threat to pay TV services
Negative on Pay TV industry
Despite of the future growth from Indonesia middle income and low penetration of pay TV; we are negative on the pay TV industry going forward – as we see there is no premium differences between FTA and pay TV channels. We think that pay TV packages are not attractive enough to draw mass market. Furthermore, we are cautious over their high level of USD exposure (100% capex are in USD).
Initiate with SELL call, 21% downside from current price
We initiate MSKY with SELL call based on the following reasons.
1. We expect near term subscribers growth to remain moderate due to soften consumption environment and rising piracy
2. We continue to believe ARPU will be under pressure – given soft purchasing power and increase in number of promotional due to competition. Since FY11 to FY14, the ARPU was down by 8% to IDR102k.
3. High exposure to USD – we see IDR depreciation will pressure the margin (100% capex are in USD 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%, market risk premium of 5%, equity beta of 0.80, terminal growth rate of 3%, which result in a WACC of 10.2%; we obtain a fair value of IDR1,100/share.
We value MSKY based on EV/EBITDA multiples over P/E based because at this stage, net profits for MSKY are depressed due to high depreciation from rapid set top box deployment and not fully reflected in the earnings potential of its business. At our target price of IDR1,100, the stock would trade at FY15F/FY16F EV/EBITDA of 9.9x/8.9x. The valuation is similar with the regional average EV/EBITDA of 9.6x/8.7x in FY15F/FY16F. Based on this, we believe our target price multiples are reasonable.
Risks
We view that there are some risks around MSKY.
1. High exposure in USD. MSKY has a significant capex and debt denominated in USD. While, its revenue are largely IDR denominated
2. New players in the market. Currently, MSKY dominated the Indonesian pay TV market, the market has a significant number of new entrants. The new entrants is Big TV, owned by Lippo Group. We see the more new entrants coming in to the market could hurt MSKY’s market share and also ARPU.
Stern Competition – Deteriorate Subs Growth and ARPU
Highest market share in the industry. Despite of the higher competition in the pay TV industry, MSKY has able to maintain the market share; based on Media Partner Asia data in FY14. MSKY managed to increase its market share from 74% in FY13 to 75% in FY14. We believe that the company’s dominant position in pay TV industry will continue in the future, based on:
1. MSKY’s strong brand name in every level of household income. Currently, MSKY operates under three brand names; Indovision, OkeVision, and Top TV. The three different brands is used to cater different income level needs. Indovision cater the upper Indonesian income level; while, Top TV brand has catered the first time subscribers of pay TV from the lower middle income class; OkeVision is gaining popularity among middle class.
2. Large, diversified, in house distribution network. MSKY has over 100 branches office accross Indonesia.
Deccelerate Indonesia economy
In 1Q15, the Indonesian GDP fell to 4.71% and we think that the FY15F GDP will stay at 5%. As a result, consumer spending which has been a driver of economic expansion is showing a signs of softening due to weaker IDR, high interest rates, and inflation on the back of increased fuel prices.
Impacts on the Indonesia economy to subscribers growth
We believe the increase in the fuel price will on average leave households with less disposable income. The impacts of this are likely to be clustered on higher income households, who are more likely to own vehicles and who spend a greater absolute sum of fuel. Poorer households will, however, still be affected through increases in the costs they are charged for energy services and any increases in the costs of non energy goods and services. We believe the increase of fuel price do have an impact to the Indonesia’s purchasing power. Thus, it will have an impact to the number of pay TV’s subscribers.
Who are the competitors?
MSKY’s competition came from Telkomvision, Transvision, Aora, First Media, and Orange TV. Despite the intense competition from other players, MSKY’s are able to maintain their market share. The company believe that Aora and Orange TV have suffered a losses due to lower subscribers growth and also lower ARPU – to compete with MSKY.
While, First Media is focussing more on broadband (high speed internet) and the company think that First Media is not a direct competitors. While, Big TV has managed to add their number of subscribers; but those subscribers are paying little due to promotions.
High competition in product offerings
We understand that the pricing competition between the pay TV operators is very intense, especially in the middle-low market. In order to attract more subscribers, the operators have been offering a very interesting packages and discounts. With a relatively similar quality of sevice, we believe pricing is the most important factor in deciding which pay TV operator new subscribers select.
MSKY’s ARPU deteriorate due to competition and slow subs growth
MSKY’s performance has slowed down in FY14, as subscribers only grew by 10% YoY in FY14 vs. 34% YoY subscribers growth in FY13. It was due to some hiccups like slowdown in economy, piracy, and clean up sales; we expect a muted growth in FY15F and we forecast 4% YoY additional subscribers to a total of 2.62mn subscribers in FY15F. We estimate the ARPU will stay flat in FY15F at IDR102k; while, in FY16F the ARPU will drop by another 0.7% to IDR101k due to fierce competition.
Bounce Back Strategy for MNC Sky Vision
New channels and services. In FY14, MSKY launched a new technology based service, called Indovision anywhere which is the first and exclusive offered by the company. The new services allows the subscribers to access all MSKY’s channels through various mobile devices and gadget anywhere and anytime. Furthermore, the company also introduced a new channels namely ZooMoo, Hits, Waku Waku Japan, MNC Home and Living, MNC Health and Beauty; bringing the current total number of channels to 141 channels.
This new services and channels could help them to have a better advantages compare to their peers; we expect the channels and service could improve the number of subscribers in FY15F and FY16F. We expect the subs growth to grow at 4%/8% in FY15F/FY16F.
Focus on in house distribution
According to management, MSKY will focus on price competitive against competitors, and expand in house distribution network. Currently, the company used to rely on third party distributors, but now they are looking into more in house distributors. The company notes that they are reducing the number of new subscribers from outsource or third party distributors – the third party will charge around USD6/number of new subscribers.
In FY14, the company managed to source 82% of new subscribers from in house distributions. We expect some margin improvements after the company succesfully depends on their in house distributors. We expect gross margin of 9.4%/9.8%/11% in FY15F/FY16F/FY17F, respectively.
Valuation
We assume a risk free rate of 8%, market risk premium of 5%, equity beta of 0.80, terminal growth rate of 3%, which result in a WACC of 10.2%. We believe that DCF is the most appropriate valuation methodology, becasue it captures the medium and long term growth prospect of MSKY.
Financial Highlights
Revenue and Gross Margin. Historically, MSKY’s revenue has been showed a stable and strong growth of 38%/26% in FY12/FY13. In FY14, revenue was slumped to 9% YoY growth; FY14 was a challenging year for MSKY – it was due to higher competition that leads to slower additional subscribers growth and lower ARPU. Furthermore, illegal pay TV operators are growing rapidly in Indonesia.
We estimate the company’s revenue will be slower than FY14, due to those reasons and it is worsen by slowdown in Indonesia economy. We expect the revenue will grow at 4%/7.5% in FY15F/FY16F, respectively. While, we forecast GPM of 9.4%/9.8% in FY15F/FY16F, respectively.
Net Profit and Net Margin
We forecast the company is still in net loss position of IDR35bn in FY15F – due to their higher interest expense (we assume IDR226bn in FY15F). Based on our estimation, we expect the company’s net profit will be positive in FY16F of IDR25bn – as we think the number of subscribers will improve in FY16F.
Shaky balance sheet
As of FY14, MSKY still in net cash position of IDR65bn, with gearing (debt/equity) of 185% in FY14. We estimate MSKY will spend IDR1.1trn for changing the MPEG 2 set up boxes with MEPG 4 set up boxes and maintanance capex. We estimate the gearing will increase to 204% in FY15F due to low cash position in the company and higher debt. We estimate the company will withdraw another IDR150bn to finance their expansion.
Company Background
History of MSKY
PT MNC Sky Vision provides satellite based pay TV service in Indonesia. Currently, the company distributes approximately 141 local channels and international channels in various segments, such as sports, news, movies, knowledges, kids, religions, entertainments, hobby/special interest, and others. It provides its service under three brand names, c. Indovision, OkeVision, and Top TV. As of FY14, the company had approximately 2.5mn subscribers. It serves DTH subscribers, and commercial subscribers, including apartment complexes, real estates, housing estates, and oil and gas companies, as well as hotels and hospitals.
