Stock in Focus: GMA7 by AB Capital Securities

Broker: AB Capital Securities

Recommendation: SELL

Target Price: 8.32

Target Price issued on: January 27, 2014

SUMMARY OF BROKER'S OPINION: We downgrade GMA Network, Inc. (GMA7) to SELL

with a Target Price of PHP 8.32. Talks of a minority stake acquisition by TEL or SMC prompted valuation multiples of GMA7 to rerate towards 19x 2014 P/E. We think this is unjustified based on current fundamentals, specifically slower growth on recurring advertisements and inability to expand profit margins.

Phil. Long Distance Telephone Co. (TEL) and San Miguel Corp. (SMC) are in talks of acquiring a minority stake in GMA7. The Philippine Daily Inquirer reported a PHP 48 billion transaction value from TEL. Assuming this as enterprise value, we arrive at PHP 8.81-10.16 as GMA7’s per share range. In a separate article, SMC’s Ramon Ang is said to be offering to buy at PHP 10.80 per share. Ang also has a connection with one of the controlling families in GMA7.

GMA7 reported nine month revenues at PHP 9.7 billion compared to PHP 9.3 billion in 9M 2012, growing 4.4% year-on year (y-o-y). However, this only makes up 74% of the full year forecast vs 79% last year.

Net profits were at PHP 1.4 billion compared to PHP 1.59 billion on year-ago levels, down 6% y-o-y. This makes up 86% of full year forecast vs 98% last year.

Recurring advertsing sales in the third quarter declined by 13% to PHP 2.6 billion from PHP 3.1 billion last year. We think this implies that advertisers continue to favor ABS-CBNs' current program offering.

RECOMMENDATION: We place our Target Price at PHP 8.32 after adjusting for 9M results. However, we downgrade rating to SELL given valuation multiples.

GMA7's P/E is at 19x 2014 vs peer median at 14x 2014. Multiples trade at an average of 12x and the current levels reflect excitement on the acquisition rather than the improvement on recurring advertisements and profit margins. We also lower our earnings projection to PHP 1.5 billion for 2013E and maintain 2014F at PHP 1.52 billion. We expect multiples to derate over the coming months given deteriorating fundamentals.

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