Surya Citra Media Sweet Bites

We initiate coverage on Surya Citra with a BUY and DCF-derived IDR3,400 TP, implying 29.0x/25.0x FY15F/FY16F P/Es. We believe local consumer firms will face macroeconomic headwinds in the near term, resulting in an ad spend slowdown in FY15. Yet, we do not think advertisers can cut ad spend for too long given Indonesia’s attractive structural appeal, ie a large population with good demographics, ongoing urbanisation and an expanding middle class.

Solid audience share in prime and non-prime time slots
Surya Citra Media (Surya Citra) focuses on national free-to-air (FTA) TV broadcasting via its stations Surya Citra Televisi (SCTV) and PT Indosiar Visual Mandiri (Indosiar). As at FY14, SCTV and Indosiar control 29% – Media Nusantara Citra (Media Nusantara) (MNCN IJ, HOLD, TP: IDR2,000) holds 30.9% – of the FTA audience share. By May 2015, SCTV had seized pole position in terms of all time audience share (prime time + non-prime time) with 16.0%, followed by PT Rajawali Citra Televisi Indonesia’s (RCTI) 15.8% and Indosiar’s 14.4%.

Revenue growth opportunity
While both SCTV and RCTI have similar audience share in prime time slots, SCTV’s advertising (ad) revenue is still ~25.0% lower vis-à-vis RCTI’s. We see a good upside in a potential rate card upgrade going forward, as SCTV has lower cost/rating point (CPRP) vs RCTI, provided it can maintain its strong prime time ratings. In the case of an economic recovery in Indonesia, we believe SCTV could be a key beneficiary. Meanwhile, Indosiar could be a key growth driver in the medium term on a successful turnaround story.

Healthy balance sheet and no USD debt exposure
As at FY14, Surya Citra has no USD debt and the company has a solid balance sheet position with net free cash flow of IDR1.3trn (vs Media Nusantara’s IDR149bn). This is exceptional vis-à-vis its peers as management focuses on generating high FCF and giving high dividend payouts.

Initiating coverage with a BUY and IDR3,400 TP (14% upside)
Our DCF-based TP is derived using 10.0% WACC and 3.0% TG, implying 29.0x/25.0x FY15F/FY16F P/Es respectively.

Risks
Further macroeconomic downturn could lead to: i) a softening in ad spend from fast-moving consumer goods (FMCG) players, ii) a weaker IDR, and iii) tighter competition impacting audience share, resulting in lower net revenue.

Investment Thesis
Doubtful on ad spend recovery in the 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:

i. A slowdown in the economy, GDP still not going back to 6%. We estimate GDP growth in FY15-16 to be in the 5.0-5.5% range and expect some recovery in FY17.

a. The economic slowdown is being brought about by the delay in government spending, and softening commodity exports and consumer spending.
ii. Anxiety over the USD/IDR outlook. Our in-house forecast is for the IDR still likely to be weak at the end of FY15. We estimate USD/IDR at IDR13,250.

iii. The fuel price hike.
In the near term, we believe Indonesian consumer companies are likely to continue facing macroeconomic headwinds, which could lead to a slowdown in ad spend in FY15. Media companies are highly dependent on corporate ad spending, with 70-80% of the revenue share coming from the FMCG industry.

Impact from macroeconomic headwinds – ad spend slowing
From our analysis, the slowdown in ad spend in the media industry was due to the slowdown in earnings growth from most of the consumer companies. We see that the advertisers, ie said consumer companies, have struggled in the current economic conditions in Indonesia, which has seen the depreciation of the IDR, and rising interest rates, wages, fuel prices and electricity costs.

Most advertisers’ earnings growth has slowed down to low single-digit or even negative territories – only Indofood Sukses Makmur (INDF IJ, BUY, TP: IDR8,200) and Gudang Garam (GGRM IJ, BUY, TP: IDR63,000) seem to holding up well. Consumer companies like Mayora Indah (MYOR IJ, NR) and Unilever Indonesia (UNVR IJ, NR) have cut their advertising & promotion (A&P) spending (10% on average) due to the current conditions.

Faith remains despite the foggy near-term outlook
We see that the timing of recovery is quite unclear and that it is likely to be based on various external factors like the rebound in the macroeconomic and political situations. However, we do not believe advertisers can cut ad spend for too long. This is because of Indonesia’s attractive structural appeal. It has a large population with good demographics, there is ongoing urbanisation and the country’s middle class is expanding. We believe that Surya Citra seems well positioned to benefit as and when ad spend turns around.

Revenue growth opportunity
As at FY14, SCTV’s prime time audience share (vs the all time audience share) of 18.6% was higher than RCTI’s 16.8%. However, in May, the latter was able to successfully overlap the former in terms of audience share with a 17.9% rating (vs SCTV’s 16.6%). In our view, even though both SCTV and RCTI have a similar audience share in the prime time slot, the SCTV’s ad revenue is still about 25% lower when compared with the RCTI.

Thus, we see a good upside in a potential rate card upgrade going forward as SCTV has lower CPRP vs RCTI, provided that the former can maintain its strong prime time ratings. In the event of a recovery in the country’s economy, we believe that SCTV can be a key beneficiary of such an outcome. At the same time, Indosiar could be a key growth driver for Surya Citra in the medium term on a successful turnaround story.

Healthy balance sheet and no USD debt exposure
As at FY14, Surya Citra has no USD debt and has a solid balance sheet with net FCF of IDR1.3trn vs Media Nusantara’s IDR149bn. When compared with its peers, this is exceptional. This is because management is focused on generating high FCF and paying out high dividends of 58-79%. By comparison, Media Nusantara’s payout is in the 29-45% range. Surya Citra is also very careful on capex spending as it looks to avoid overspending on capex.

Initiate coverage on the stock with a BUY call, 14% upside potential
In the current economic conditions, we believe it would be best to find a value stock that has minimum USD exposure, a strong balance sheet and solid corporate governance. We have BUY recommendation on Surya Citra as we believe the company is the most profitable media broadcaster in Indonesia (with high net margins of more than 35% in the industry) and has a dominant FTA TV audience share of 30.4% as at May via SCTV and Indosiar. Furthermore, Surya Citra disburses one of the highest dividends, with a 58-79% dividend payout ratio.

Our BUY call and IDR3,400 TP (14% upside potential) implies 29.0x/25.0x FY15F/FY16F P/Es respectively. This is a premium when compared with its peers, but we believe this is justified given:
i. Potential revenue growth from SCTV from a higher rate card
ii. Indosiar’s potential growth after a successful transformation, given that is coming from a low base
iii. Rate card improvement from lesser CPRP when compared to peers
iv. Higher gross and EBITDA margin due to cheaper in-house content
v. Offers highest ROEs of 43% (FY15F) and 44% (FY16F) when compared to domestic and regional peers. For example, Media Nusantara stands at 21% (FY15F) and 22% (FY16F) while Media Prima (MPR MK, SELL, TP: MYR1.40) is at 9.7% (FY15F) and 10% (FY16F)

Currently, Surya Citra is trading at 25.6x FY15F P/E. By comparison, Media Nusantara, Media Prima, Sun TV Network (Sun TV) (SUNTV IN, NR) and TV18 Broadcast (TV18) (TV18 IN, NR) are trading at FY15F P/Es of 14.0x, 11.0x, 15.0x and 16.0x respectively. In fact, the company was trading below their average P/E of 25.8x. We also believe that, the current share price, the macroeconomic headwinds haves been priced in.

Our IDR3,400 TP is based on DCF, as we believe it is the most appropriate valuation methodology because it captures the medium- and long-term growth prospects of Surya Citra. We assume a risk free rate of 8%, a market risk premium of 5%, equity beta of 0.9 and TG rate of 3%, which results in a WACC of 10%.

Standout In Prime And Non-Prime Time Audience Shares
Maintain prime time leadership. SCTV has always been one of the Top 5 FTA channels in Indonesia. It competes head to head with RCTI, PT Televisi Transformasi Indonesia’s Trans TV and Visi Media Asia’s (VIVA IJ,NR) antv. As at end-Dec 2014, SCTV secured top ranking in terms of audience share with 18.6%. By comparison, RCTI, Trans TV and antv garnered 16.8%, 11.7% and 11.9% audience shares respectively. SCTV’s success was back by the huge acceptance of prime time drama Ganteng Ganteng Serigala, which saw the station’s audience share jump to 20.9% in Jun 2014.

As at May, however, SCTV has lost some of its market share to RCTI and subsidiary Indosiar. The station’s audience share dropped to 16.6% while RCTI managed to achieve 17.9%. This was attributed to the decline in Ganteng Ganteng Serigala’s popularity. However, we opine that SCTV could maintain its market share in FY15, backed by new dramas like Madun and Samson & Dahlia.

Powerful content to grab audience share
Content is a vital component for success in the television industry. The content provided by each station has its own uniqueness and characteristics. The type of content provided by SCTV and Indosiar are divided into two categories: i) in-house, and ii) outsourced.

SCTV’s main focus is on dramas
One of its breakthrough series that was developed by its programme team was Ganteng Ganteng Serigala. The sinetron was a hit, holding the top spot for eight consecutive months (Apr-Nov 2014) (see Figure 12). The success of this in-house strategy was followed up by other programmes like Diam Diam Suka and Mak Ijah Pengin Ke Mekah, which continue to help maintain SCTV’s audience share.

Indosiar’s focus, on the other hand, is more towards shows like music programmes. At the beginning of 2014, the station’s in-house production team developed a new music programme called Dangdut Academy. The programme was successful in promoting dangdut music into a new music trend preferred by Indosiar’s views, which directly led to achieving the highest rank in terms of audience share.

Battle of the industry giants
SCTV focuses its prime time segment on local dramas that target a female audience, much like its competitors such as RCTI. In this prime time segment, SCTV has a rate card of IDR60m per 30 seconds. Three of the station’s prime time programmes have managed to secure a place amongst the country’s Top 10 most popular TV shows, with average rating points of 2.7-4.3 overall in June.

By comparison, RCTI’s average rating points were at 3.2-3.8. We believe that SCTV still generates a good amount of prime time revenue, considering its high rating points, and this could provided it with a bargaining chip when it comes to charging a higher rate card.

Strong prime time and non-prime time
We believe SCTV’s strong position in the prime time segment and superb position in non-prime time (See Figure 11) has placed the station comfortably in the top position in terms of all time audience share. As at 2014, SCTV’s all time audience share was 17.1%. During the same period, RCTI, Trans TV and antv stood at 15.1%, 10.8% and 11.8% respectively.

In early FY15, SCTV lost its dominant audience share position to RCTI and Indosiar. Between February and April, the station’s audience share declined to third position. This shift was due to Indosiar’s D’Academy, which had high ratings.

However, as at May, SCTV returned to the top spot with an audience share of 16% vs RCTI’s 15.8% and Indosiar’s 14.4% due to new fresh series like Madun and Samson & Dahlia. We like SCTV’s strategy of having a balance strong performance in prime time and non-prime time audience share. We believe that its strong and consistent high audience share could translate into potential rate card growth. We see that Surya Citra ought to manage to keep ratings high for SCTV.

Lowest advertisers’ CPRP on prime time
Due to its highly-rated dramas such as Ganteng Ganteng Serigala, Madun and Samson & Dahlia, SCTV offers the most efficient CPRP for advertisers during prime time. For June, Madun offered advertisers the cheapest CPRP, c.IDR13m. If we compare RCTI, SCTV, and antv, who have a similar target market, SCTV has the lowest average CPRP. This makes the network a more appealing advertisement platform. SCTV has an average CPRP of IDR16.8m vs RCTI’s IDR17.2m.

Indosiar: New Star Is Born
Transformation of Indosiar after the merger. Surya Citra has successfully transformed Indosiar with its programme synergy strategy. The company decided to move the station out of the drama series programming segment, with Indosiar’s prime time main focus now on variety and entertainment shows. This decision has driven Indosiar’s audience shares to 18.2% as at May. By comparison, its FY13 average, ie before the merger, was 8.7%.
The introduction of variety shows like D’T3rong and D’Academy was a big success for Indosiar.

Note that D’Academy was aired for 3-4 months (March-June) and, in this period, Indosiar’s prime time audience share increased to an average 17% in FY14. However, the station’s prime time audience share took a freefall to 11% in Jul 2014 once D’Academy went on hiatus. In early FY15, Indosiar began to benefit from Season 2 of D’Academy and, as at May, its prime time audience share stood at 18.2%. While we remain anxious as to what happens when Season 2 ends in June, Surya Citra has already prepared new shows like New Family 100 and D’T3rong. Thus, we expect these show would help Indosiar maintain its audience share.

Focus On In-House Production
Operating at highest gross margins when compared to competitors. Surya Citra operated at high gross margins of 63.6% in FY14 vs Media Nusantara’s 57.8% during the same period. The company’s high margins were accomplished via cost savings on programming and broadcasting expenses. Surya Citra utilised its efficient in-house production team to provide the company with its programmes content. Currently, 70% of its programmes cost content comes from in-house production.

It is also cheaper vis-à-vis outsource production, with the cost of in-house produced movies at around IDR200m-250m vs outsourced production’s IDR300m-350m. Additionally, a third of ad revenue generated from the broadcast of the outsourced programme is paid to the outsource party as a performance bonus. Surya Citra’s in-house production team, Screenplay Produksi, can generate 20 movies per month. We expect gross margins of 63.2%/65% in FY15/FY16 respectively.

In-house production is vital
We think that in-house production is one of the reasons why Surya Citra has better margins (ie, cost savings). The company has three production houses under the Emtek Group, namely Screenplay Produksi, AS Production and Dreamtoon. As of May 2013, Surya Citra acquired a 51% stake in Screenplay Produksi for IDR242bn from Elang Mahkota Teknologi (EMTK IJ, NR). Screenplay Produksi is focused on creating drama programmes, including drama series and TV movies (FTV) that air on SCTV. AS Production, on the other hand, produces drama series that are skewed towards broadcasts on Indosiar.

With this strategy of producing more of in-house content, it helps Surya Citra to save around 25-30% in terms of content costs. As a comparison, the cost for a drama series produced by Screenplay Produksi is IDR200m-250m (USD20,000) per episode while for MD Entertainment or SinemArt, costs per episode are in the at least IDR300m-350m (USD30,000) range. Surya Citra’s current famous variety talent and quiz shows like D’Academy and New Family 100 are produced in-house at an average cost of IDR70m-80m per episode (USD7,000-7,500). As the company starts its transition to use more in-house content, we expect continuous margins improvement for Surya Citra.

Focus on local content
In general, Indonesians prefer to watch local content TV programmes, which vary from live and variety shows to soap operas (sinetrons). Outside the big cities like Jakarta, Surabaya and Bali, where educations levels are not as high, many Indonesians still prefer to watch locally-produced TV shows vis-à-vis foreign language ones. We believe this is because of the language barrier and different lifestyles. Hence, demand for imported content from outside Asia is still limited. It has to be noted that most of Surya Citra’s TV programmes made up the bulk of the Top 10 shows in Indonesia in June.

Valuations
We assume a risk free rate of 8%, market risk premium of 5%, equity beta of 0.9 and TG rate of 3%, which results in a WACC of 10%. We believe that DCF is the most appropriate valuation methodology, because it captures Surya Citra’s long-term growth prospects.

Scenario Analysis

Base case scenario
Our TP of IDR3,400 is based on the following base case assumptions for ad spending (revenue). In our base case, we estimate the GDP at 5% and use GDP multiplier of 0.9x, given that we believe there is a correlation between ad spend growth with GDP. As for Surya Citra, we estimate for revenue to likely grow at 6%/12.5% in FY15/FY16 respectively.

Bull case scenario
In our bull case scenario, we assume 6.0% GDP in FY15 and are using 2.0x GDP multiplier to calculate growth. In this bull case scenario, we assume that infrastructure projects have already been realised in the next few quarters of FY15, the USD/IDR would recover and there are improvements in the price of commodities. Based on our forecast for Ad spend growth for Surya Citra will grow at 12%/16% in FY15F/FY16F respectively; assuming other things remain constant.

Bear case scenario
In our bear case scenario, we assume GDP of 4% in FY15, with growth numbers achieved using the 0.6x GDP multiplier. In our bear case scenario, we think that the USD/IDR is likely to drop further, and there is slower consumer spending on higher interest rates and fuel prices. Assuming all other things remain constant, we forecast for ad spend growth for Surya Citra at 4%/8% in FY15/FY16 respectively.

Revenue and gross margins
Historically, Surya Citra’s revenue has been showing stable and strong growth – 20% on average between FY08 and FY14. In FY09, revenue was slightly down 6% YoY – at that time, the company decided to shift from outsourcing content (from MD Entertainment) to in-house production. This decision caused near-term pain for Surya Citra, but has provided long-term comfort till now. Gross margins started to jump significantly in FY11 to 69.7% from an average of 53% between FY07-10. This was attributed to in-house production and lower content costs.

We estimate for Surya Citra’s revenue to grow at 6%/12.5% in FY15/FY16 respectively. Our reasoning for the muted growth is the macroeconomic headwinds that we think would have an impact on the company’s performance this year. Net profit and net margins. We expect Surya Citra’s FY15/FY16 net profit to be at IDR1.50trn/ IDR1.73trn. We expect the growth to increase by 14% CAGR between FY14-FY19F.

Solid balance sheet
Surya Citra has a solid balance sheet. It has also always been in a net cash position. In FY15, the company plans to invest IDR150.0bn in capex. This was down from the original IDR350.0bn plan, which was due to the delay of Indonesia digitalisation program.

Risks. We view that there are some risks surrounding Surya Citra:
i. Slower A&P spending from FMCG players. FMCG companies contributed 70% of media companies’ revenue. For the moment, the Indonesian economy has slowed down and we are afraid that the FMCG corporates are likely to reduce or cut their A&P spending, which means lower ad spend growth.
ii. Weaker IDR. Media companies have some exposure to USD/IDR through their content. Some of the media companies are still importing overseas content. Thus, a weakening IDR further could increase programming cost and hurt margins. Currently, 15% of Surya Citra’s costs are linked to the USD (from the Barclays Premier League, Champions League and U19 Football). However, the USD costs are likely to vanish in FY16, given that the company is not looking to extend contracts for football matches.
iii. Tight audience share competition. Competition in terms of audience share is very competitive. Lose of audience share for Surya Citra could reduce its bargaining power for its rate card and result in possibly offering more discounts, which in turn would lead to lower net revenue.

Company Background
History of Surya Citra. Surya Citra was first established under the name of PT Cipta Aneka Selaras in 1999. The company is controlled by EMTEK group (EMTK IJ) – which owned by Sariatmadja family (75%). The company business line include multimedia business, media consulting, in house production, animation, online media, entertainment, film, and music. Surya Citra owned two FTA TV in Indonesia; SCTV and Indosiar. The company has succesfully merged with PT Indosiar Karya Mandiri and took control Indosiar in 2013. The company also owns 51% stake of production house; Screenplay.

SCTV And Indosiar At a Glance
SCTV’s story. SCTV is an Indonesian TV station that broadcasts nationwide on the UHF band and is able to be received throughout the Indonesian archipelago on analogue PAL TV sets.

SCTV started broadcasting on 24 Aug 1990 in Surabaya as Surabaya Centra Television, broadcasting to the city and the surrounding area. At first, the programming was similar to RCTI’s. In fact, it used some of the latter’s news programmes until it could produce its own. On 1 Aug 1993, SCTV obtained a national license and eventually moved its operations to Jakarta.

Indosiar’s story
Indosiar is a national television station in Indonesia that was established in 1994. It has been a member company of the Emtek Group since 2011 and has been fully-owned by the group’s subsidiary Surya Citra since 1 May 2013.
The station has a strong focus on cultural programming, such as shows dedicated to wayang puppet performances. At the same time, it has recently been broadening its horizons with reality TV programmes and talk shows.