In this briefing:
- How the Mighty Fall…Or Should That Be A “Who Will”?
- SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability
- BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
- PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office
- SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town
1. How the Mighty Fall…Or Should That Be A “Who Will”?
Jim Collins‘ book ‘How the Mighty Fall’ highlights some interesting pitfalls that great companies decline or even collapse and follows them in stages. For our purpose as investors or market watchers, the important thing is figuring out how (or rather which company) these principles apply to. In this review, we ignore the stages (since they are more likely to happen in the future) and instead look out some Thai companies where we are starting to see these vulnerabilities or symptoms.
- Overreach is arguably the biggest symptom. Diversifying into areas they don’t take seriously or have no expertise in. Sometimes, it just means having way too many products, which could be the case for BJC or Jaymart.
- Blame game culture. When companies dig out reasons to allocate blame rather than find solutions, it’s a big red flag. Speaking to folks that have left the firm, this sounds a lot like TMB.
- Denial of the obvious. Collins’ best example for this was how Motorola ignored all the warnings about Iridium’s failures. When we visited Finansia Syrus, we couldn’t help feeling that they were doubling down rather than finding a more realistic solution.
- Overconfidence is the flaw most likely to come to great companies. Watch out for companies that highlight all the positives and skim over the risks. Our meeting with Asia Plus sounded a bit too good to be true.
Companies that undergo decline may recover at some point, but it’s good for investors to be aware of them so you know what kind of risk you are buying into.
2. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability
- Sales on an upward trend, good core profit return, and earnings on an upward trend relative to its sector
- Well-positioned to win some upcoming bids for public and private projects such as the MRT Purple Line, expressway, and high-speed train to boost earnings moving forward, net profit up by 134% in 3Q18 YoY
- Strong backlog of public and private projects amounting to around Bt3bn to help sustain revenue growth, 104% in 3Q18 YoY
- Trades below Thai Industrials at 19CE* 4.1x PB, offers much higher ROE, and a solid balance sheet
- Risks: Delay in construction, volatility in raw materials prices
* Consensus Estimates
3. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
Breadtalk (BREAD SP) has been a great Singapore Inc story since its founding in 2000. The company, under the leadership of George Quek, has grown from a few bakery outlets to hundreds of outlets across Asia. Profitability at Breadtalk has been lackluster but shares remain cheap on an EV/EBITDA basis.
Meanwhile, the group has an aggressive target to achieve 8% NPM by 2020 which not a single sell-side analyst believes they can achieve. Over the past week, the CEO was quoted in a Business Times article saying that he wants to achieve a “1 billion SGD market cap” vs the 480 million SGD market cap currently. While this could be easily dismissed as marketing talk, this target is not unrealistic at all.
With the launch of its first Din Tai Fung outlet in London investors better take notice. One of the drivers of upside surprises might be the rapid roll-out of Din Tai Fung in the UK and the rest of Europe. The CEO is even keen to explore expansion in the US market and has done research trips to Texas, LA and New York.
With the shares having derated from 1.16 SGD in early August to 0.86 SGD recently the valuation (6.8x 2019 EV/EBITDA) is now attractive once again. My Fair Value estimate remains at 1.25 SGD (47% upside).
4. PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office
We maintain Plan B Media (PLANB TB) with a BUY rating, and the new target price of Bt8.30 derived from 1.5xPEG’2019E, which is the average of Thailand’s consumer discretionary sector or equivalent to 32xPE’19E
The story:
- Revising up net profit in 2018-20E by 2-11% mainly from BNK office
- Music and sports marketing drive earnings momentum north
- Plenty of opportunities to monetize underutilized capacity
Risks: Obstacles for renewing concession contracts with state-owned enterprises along with falling consumer spending and a share-price dilution effect on the back of then generally mandated raise in capital.
5. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town
The conclusion from a recent meeting with the management of Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta was that the company is ready to grasp the nettle of moving a significant focus towards the digital space. That said, it is clear that Free-to-Air business is still very much alive and kicking and will be the core driver for some time to come.
Media Partners Asia suggests that the advertising revenues for the Free-to-Air TV industry in Indonesia can grow +5.6% CAGR between 2017-2023.
Internet companies are driving growth at the margin but also make-up 2/3rds of the 15% of total spend on digital advertising, which suggests only 5% lost from TV.
Surya Citra Media Pt Tbk (SCMA IJ) is on the cusp of a significant move into the digital advertising and content space through Vidio.com, Kapanlagi.com, as well as its payments gateway Dana.
The company will also enter a new advertising medium of outdoor billboards, where it will seek to consolidate the industry through acquisitions, with the aim of controlling 50% of this market.
Surya Citra Media Pt Tbk (SCMA IJ) remains the best media proxy for advertising in Indonesia. It has seen its two main Free-to-Air stations SCTV and Indosiar command number 1 & 2 audience share positions over the last two months, giving an overall prime-time audience share YTD of 35%. The company estimates that the core business can probably achieve growth of +10% over the next two years. The real kicker to growth for the company will come from its significant move into the digital and content space through a series of acquisitions, mainly from its parent Elang Mahkota Teknologi Tbk (EMTK IJ). These transactions are will be done at arm’s length so as to avoid any corporate governance concerns. According to CapIQ consensus, the company is trading on 16.7x FY19E PER and 15.1x FY20E PER, with forecast EPS growth of 8.6% and 10.6% for FY19E and FY20E respectively. The company also has a dividend yield of 3.9% for FY19E and generates an ROE of 32%.
