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UBS Investment Research
Zee Entertainment Enterprises Ltd
Management meeting takeaways
[ ERRATUM]
Event: stock down 8% in last five trading sessions; management meeting
Key takeaways from our meeting with management: Zee is likely to report a weak
Q1 FY12 result as: 1) advertising volumes have declined significantly since mid-
May; 2) sports losses are likely to be significant in the quarter; and 3) one-time
expenses related to the brand revamp. The share price was down 8% in the past
five trading sessions primarily on expectations of a weak Q1 result, in our view.
Impact: lower FY12 EPS estimate 7%; lower PT from Rs170 to Rs160
We lower our FY12 revenue forecast 2.3% and cut EBITDA margin 120bp to
24.8% as we reduce our ad revenue growth forecast from 15% to 10%. We believe
ad volumes will bounce back during the festive season in H2 FY12.
Action: maintain Buy; weak Q1 result could provide buying opportunity
We remain positive on Zee, as it should benefit from increasing digitisation. The
formation of Media Pro Enterprise (a distribution JV with Star Den) is positive for
Zee in the medium term and should contribute to subscription revenue growth
starting in FY13. Zee has a sound balance sheet with Rs12.5bn net cash and strong
FCF yield of 4.8% in FY12E. We believe there is limited downside to the share
price at current levels, as the company may buy back shares of up to Rs7bn at a
price less than Rs126 per share (6-7% of total shares outstanding).
Valuation: DCF-based price target of Rs160
We derive our price target using a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
12%.
Management meeting takeaways
Zee management highlighted that Q1 FY12 may be weak:
— While Zee has maintained advertising rates, ad volumes have declined
significantly since mid-May.
— Sport broadcast losses are likely to be significant, as Zee telecast the
India-West Indies cricket match this quarter, which raised operating costs.
— Likely one-time expenses related to the brand re-vamp in the quarter.
Zee maintains guidance for a sports loss of Rs800m-1bn for FY12; it expects
sports losses to reduce significantly in FY13. Some of Zee’s key cricket
telecast rights are due for renewal in 2013. Management is likely to be
rational about bidding for telecast rights this time, given the size of the losses
in the recent past.
Media Pro Enterprise is now operational (since 1 July) and is likely to take
three to four quarters before it starts contributing to subscription revenue
growth. Zee typically enters into annual contracts and has entered into fixed
price contracts with three DTH operators.
Financials
We lower our FY12 revenue forecast 2.3% and cut EBITDA margin 120bp to
24.8% as we reduce our advertising revenue growth forecast from 15% to 10%.
We believe advertising volumes will bounce back in H2 FY12.
Valuation
We maintain our Buy rating with a new price target of Rs160 as:
Zee should benefit from increasing digitisation, as it reduces revenue leakage
and improves operating margin.
The formation of Media Pro Enterprise (a distribution JV with Star Den)
should be positive for Zee in the medium term and contribute to subscription
revenue growth starting in FY13. We believe a company that distributes Star
Plus and Zee TV as part of the same package has strong bargaining power,
and can negotiate better subscription revenue deals with multi-system
operators and DTH operators.
Zee has a sound balance sheet with Rs12.5bn net cash and strong FCF yield
of 4.8% in FY12E.
We believe there is limited downside to Zee’s share price at current levels, as
we think the company may buy back shares for up to Rs7bn at a price less
than Rs126 per share (6-7% of total shares outstanding).
Zee Entertainment Enterprises Ltd
Zee Entertainment Enterprises (Zee) is a cable and satellite channel operator
with Hindi language and regional language programming. The relaunch of Star
as a Hindi language network in July 2000 raised competitive pressure in the
domestic broadcasting business. Zee is building up pay revenue as a second
driver of its earnings growth, as advertising revenue is faltering because of weak
advertising spend by companies and Zee's low audience share. Zee was the first
to launch a direct-to-home service in India.
Statement of Risk
We believe Zee faces multiple risks in its content and broadcasting business in
terms of the success or failure of its programming. It also faces intense
competitive pressure from competing networks, which could impact its
viewership ratings and advertising revenues.
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