Philippine media major ABS-CBN is benefiting from decent operating leverage and it’s being rewarded by investors. Over the six months to August 12, ABS-CBN’s share price has risen 38%, easily outperforming competitors such as PLDT and GMA.
Investors particularly like the fact that ABS-CBN’s broadcast business is maintaining a handle on production costs, which fell by 4% over 1H 2014. Underlying broadcast revenue growth is robust, and the company’s movie and global distribution divisions are firing on all cylinders. In addition, the company’s pay-TV business remains solid.
Results posted yesterday indicated that net profit reached P995 million (US$22.8 million) over 1H 2014, 44% higher compared to the same period last year after removing the effect of election-related ad spending. Ebitda grew 5% to P3.4 billion, close to a 21% margin.
Industry analysts Media Partners Asia (MPA) had cautioned that net advertising for the Philippines' dominant free TV sector would drop in 1H 2014 following a strong 2013, but MPA expects a pickup in 2H.
According to media buyers, advertising dropped in Q1 but started to stabilize in Q2, and will likely improve over both Q3 and Q4.
After 17% net growth last year, measured after rate card discounts, MPA estimates that the Philippines' free TV advertising market will grow by 1.2% this year and rebound to 7% in 2015. Free TV will continue to represent more than 70% of the ad market.
“The biggest recent change is the way media agencies are taking more notice of rural and national household ratings, whereas before they were more focused on Metro Manila,” says Jambi Reyes, an analyst with MPA.
“That will put ABS-CBN at an advantage over GMA because ABS-CBN has a much stronger free-to-air signal across the country than GMA does. We also expect its signal in Manila to improve once digital terrestrial television (DTT) launches.”
ABS-CBN ad sales improved on a quarterly basis in Q2 after a rate hike in February 2014 plus higher ad volumes, as the FMCG sector slowly started to increase spend.
Encouragingly, ABS-CBN has seen ad sales growing in July and August.
The company is guiding to meet its full-year profit targets on the back of free TV advertising gains, pay-TV & broadband subscriber growth at SkyCable, the continued strength of its movie business (Star Cinema) and various cost-saving measures.
The Philippines’ shift towards DTT transmission, in which ABS-CBN has already invested P2 billion over the past three years, is expected to start before the end of 2014. ABS-CBN is focused on improving the reception of its flagship channel in Metro Manila, extending the coverage area of its free TV network and expanding its channel offerings.
At the same time, ABS-CBN continues to reduce its reliance on advertising with investments in new content development, program syndication, licensing, mobile and home shopping. Advertising sales contributed 54% to its top-line in 1H 2014, versus 59% a year ago.
Mobile is a concern for investors, generating a net loss of P638 million in 1H 2014, although subscriber activations are gradually trending up, reaching 750,000 in August. The company is targeting 1 million this year and 2 million in 2015, potentially enough to start breaking even.
The mobile business is operated under a network sharing agreement with Globe Telecom.
The company's O Shopping channel business, a JV with Korea’s CJ launched in November 2013, is already generating over P1 million in daily sales with breakeven likely by the end of year.
ABS-CBN is also opening an educational theme park (KidZania) in Q1 2015.
Meanwhile, competition in the Philippines' free TV, pay-TV and broadband markets remains significant, although ABS-CBN appears to be benefiting from a competitive edge in most of these segments.
The SkyCable business is robust, capitalizing on low-base gains in the broadband business and advertising growth and reasonable momentum in pay-TV, but more upside could come through repackaging and upselling.
PLDT-owned pay-TV competitor Cignal reported 755,000 subs at end-June 2014, approaching a similar subscriber scale to SkyCable (including Destiny), which had 780,000 subs at end-June. Cignal’s monetization requires significant improvement however, although the company has achieved breakeven on an Ebitda basis.
TV5, the PLDT-owned free TV business, continues to lose money although on a declining basis. The PLDT retirement fund will have to invest an additional P2-2.5 billion to fund the business this year, which is only likely to break even after another two to three years.
GMA Network remains in talks with San Miguel Corp’s president Ramon Ang despite speculation that the latter has taken a 34% stake in the broadcaster. GMA's earnings are likely to be soft for the full year, bolstered only by its international business.
Ebitda margins for both ABS-CBN and GMA are trending in the 20-25% range.
ABS’s international business remains increasingly strong, up 11% in 1H and accounting for more than 16% of turnover, benefiting from a good blend of theatrical, advertising and pay channel subscription sales.
As a leading independent consulting and research provider focused on Asia media & telecoms, MPA offers a range of customized services to help drive business development, strategy & planning, M&A, new products & services and research. Based in Hong Kong, Singapore and India, MPA teams offer in-depth research reports across key industry sectors, customized consulting services, industry events to spread knowledge and unlock partnerships, and publications that provide insights into media & telecoms.
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