Surya Citra Media-Target price Rp8,500

Cost efficiency to drive net profit growth

What’s New
􀂃 Management targets FY11 revenue of Rp2.3t or 19% y/y growth, and 20% growth for FY12. The company will maintain cost efficiency by focusing on cheaper in‐house production than outsourced production. Portion of in‐house production will be increased to 45% from 40% in
FY12.
􀂃 In 9M11, the company’s revenue grew 25% y/y to Rp1.8t and net profit increased 101% y/y to Rp671b.

Our View
􀂃 Management’s FY11 revenue target is in line with our expectation, whereas its 2012 target was above our expectation. However, we maintain our revenue target of Rp2.7b (16% y/y growth).
􀂃 In 9M11, revenue was in line with our expectation, driven mostly by advertising rate increases. Management said utilization of advertising volume has reached full capacity amid limited advertising hours of maximum 20% from 24 hours, while spot bonuses are relatively small. 9M11 net profit was above our expectation, supported by improvement in efficiency, which led to COGS declining 8% y/y and gross margin coming in at 67.2% (the highest level since listed in 2002).
􀂃 Due to cost efficiency improvement this year and more cost efficiency efforts next year, we increase our gross margin assumption to 67% and 63% for FY11 and FY12 (from 60% and 58%). As a result, we upgrade our net profit estimate by 27% and 19% to Rp856b and Rp976b.

Action & Recommendation
􀂃 As we upgrade net profit estimate, we raise our TP to Rp8,500 (from Rp7.500). Our TP pegs the stock at 16.9x 2012 P/E, which is still cheaper than average P/E of TV companies in the region of 19.9x. BUY.

9M11 net profit surpassed our expectation, but revenue came in line
The company’s net profit increased 101% y/y to Rp671b, surpassing our expectation. The higher net profit was driven by better efficiency (COGS reduced 8% during the period), and 25% higher revenue to Rp1.8t. Management said cost efficiency improved as the company focused on
developing local programs from both in‐house and third‐party production. Cost efficiency improved after the company appointed Screenplay (affiliated), a production partner. Screenplay is owned by Emtek (EMTK.IJ), SCMA parent’s company. Yet, SCMA is not obligated to buy programs from Screenplay.

Although SCMA focused on cost efficiency and changed the production partner, the company was still able to increase audience share (maintain the second‐largest audience share) to an average 16.3% in 9M11 from 15.3% in 9M10. RCTI has the largest audience share (under MNCN.IJ) of 17.7% in 9M11 from 16.5% in 9M10. In 9M11, revenue grew 25% y/y to Rp1.8t, in line with our expectation, driven mostly by increase in advertising rates. Management said utilization of advertising volume has reached full capacity, amid a regulation that limits
advertising hours to a maximum of 20% from 24 hours or 4 hours 38 minutes per day. Meanwhile, spot bonuses are relatively small amid higher advertising spending by companies.
Due to cost efficiency improvement in 9M11 (the company achieved the highest gross margin at 67.2% since it was listed on IDX in 2002), and further such effort in 2011 (gross margin will still be targeted above 60% next year), we increase our gross margin assumption from 60% and 58% to 67% and 63% for FY11 and FY12 respectively. As a result, we upgrade our net profit estimate by 27% and 19% to Rp856b and Rp976b respectively.

source: KIMENG dated 16 November 2011