Surya Citra Media Hopes For a Swift Recovery

We downgrade our call to NEUTRAL (from Buy) with a lower IDR3,300 TP (3% upside) as SCTV’s audience share declined further to 8.8% in Mar 2016 – the lowest since 2011. Also, we think the recovery in the media industry may not benefit Surya Citra in the near term due to its low audience share. Hence, we cut FY16F-17F earnings to IDR1.6trn/IDR1.8trn respectively from IDR1.73trn/IDR2.0trn. We foresee FY16F GPM would stay at 64% due to the company’s recent purchase of Indonesia Super League in an effort to boost its audience share.

SCTV’s weak audience trend likely to continue
Surya Citra Media’s (Surya Citra) prime time audience share fell to 26.7% (-2% MoM, -16% YTD) in Mar 2016, dragged by the weak performance of Surya Citra Televisi (SCTV) (-21% YTD) which lost its audience share to Rajawali Citra Televisi (RCTI). In addition, good prime time audience share performance from its other TV station (Indosiar) could not offset the decline in SCTV’s audience share, which is unlikely to recover in the near term, in our view.

Reduce advertising revenue growth to 8% in FY16F
We had previously projected advertising revenue to grow 16%/15% in FY16F-17F given a recovery in the media industry. However, we did not expect SCTV’s audience share to decline further to 8.8% in Mar 2016 – the lowest since 2011. Taking this into account, we cut our FY16F-17F advertising revenue growth for Surya Citra to 8%/10% respectively. We foresee higher contribution from Indosiar in FY16 due to the sustained performance of the “D’Academy” show which could lead to an improvement in its rate card.

Margins to remain flat in FY16F
As at 1Q16, Surya Citra increased its content from third parties to 40% from 15% in FY15. We foresee there would be an impact on its margins in FY16 – as third-party content is more expensive than in-house production. Furthermore, the company’s recent purchase of Indonesia Super League could potentially squeeze its margins. We foresee GPM to remain flat at 64.3% in FY16F (vs 64.1% in FY15).

Potential upside catalyst
Surya Citra has came up with a strategy to improve SCTV’s audience share by adding more slots for fresh series, reducing re-runs of film television (FTV), and introducing more awards programmes. It also plans to air Indonesia Super League during prime time this month. These initiatives should help improve its audience share going forward.

We downgrade our call to NEUTRAL (from Buy) with a lower IDR3,300 TP (from IDR3,700), as we await the outcome of the company’s efforts to improve its audience share numbers in 2H16 from a low base from SCTV. Upside risk to our call would be Surya Citra’s strategy implementation bearing fruit while the downside risk would be SCTV’s audience share failing to recover.

Revising FY16F -17F Assumptions
We lower our assumptions on advertising revenue growth for FY16F-17F to 8%/10% respectively from 16%/15%, taking into consideration SCTV’s weak audience share performance since Jan 2016. SCTV’s prime time audience share declined 21% YTD to 8.8% in Mar 2016 (-2% MoM). This was due to the strong performance of RCTI TV station with its drama series.

Based on Nielsen’s top 20 drama series from Jan-Mar 2016, RCTI dominates the list with six of its TV programmes in the top 10 ranking. Its strong performance led to a better rate card. We think SCTV has lost its market share to RCTI.
We foresee higher contribution from Indosiar in FY16 due to the sustained performance of the “D’Academy” show which could lead to an improvement in its rate card.

Valuation
We assume a risk-free rate of 8%, a market premium of 5%, and a TG of 3%, which result in an implied WACC of 10.7%.

Revenue supported by Indosiar in FY15
SCTV achieved net revenue of IDR2.7trn (-0.4% YoY), while Indosiar generated IDR1.58trn revenue (+11% YoY). The strong improvement in Indosiar’s revenue was due to its strong audience share performance in FY15. In Oct 2015, Indosiar introduced a new talent show called “Stand Up Comedy” and recorded a very strong audience share of 16%. It also aired a local soccer competition called “Piala Presiden” in the same month that boosted its audience share performance.

Cost of programmes up 3% YoY
The increase in the cost of programmes and broadcasting was mostly due to the cost of broadcasting Surya Citra Media (SCM) Cup in Jan 2015 and the Sea Games in Jun 2015 on both TV stations. Furthermore, SCTV incurred higher programme costs as the weaker IDR resulted in higher costs of imported sports programmes and Turkish series “Elif” (USD2,000 per episode).

GPM expanded on discontinuation of European Champions League
The discontinuation of foreign-based content that expired in Jun 2015 led to a better GPM in 4Q15 (68.1% vs 3Q15’s 61.8%). Meanwhile, depreciation and amortisation – related to the investment in replacing and upgrading broadcasting and transmission equipment and towers as well as refurbishment at transmission sites – increased 16% YoY to IDR133bn.