TRIS Rating has affirmed the company rating of Nation Multimedia Group PLC (NMG) at “BBB+”and has revised the rating outlook to “stable” from “positive”. The outlook revision reflects TRIS Rating's view that the commercial benefits of the new foray into digital television (TV) will take a longer time than expected to materialize.
The rating reflects NMG’s established brand equity as a multimedia news content provider, the strong market positions of the company’s newspapers, and well-managed liquidity. However, these strengths are partially offset by the volatility of the advertising industry, which is NMG’s main source of revenue, as well as intense competition in the digital TV industry, and its weaker profitability.
The “stable” outlook reflects the expectation that NMG will continue its leading position as a multimedia news content provider while maintaining its financial strength. The rating could be upgraded if NMG delivers stronger-than-expected operating performance and make material increases in its operating cash flow. The downside risk will be triggered if competition in the digital TV platform is heightened or if NMG's overall performance continues to deteriorate.
NMG, widely-known and recognized as the Nation Group, is a leading multimedia company in Thailand. The company's shareholder structure has changed during the past year. As of May 2015, NMG’s major shareholders were News Network Corporation PLC, holding a 12.21% stake, Mr. Suthichai Sae-Yoon (10.01%), Mr. Siwasit Sainampeung (9.14%), and Polaris Capital PLC (7.54%). The change in the shareholding structure shall be monitored whether there are any impacts on the company’s business direction or key management which are the supportive factors to NMG's credit quality.
NMG’s lines of business include publishing, broadcasting, edutainment, education, printing, and logistics. The publishing and the broadcasting segments are the main revenue generators, contributing 45% and 40% of NMG’s total revenue and 31% and 45% of EBITDA (earnings before interest, tax, depreciation, and amortization) for the first half of 2015, respectively.
NMG’s main source of revenue is from advertising, both in newspapers and on digital TV. Generally, advertising spending for all media types moves in tandem with economic conditions. The ongoing slowdown of the domestic economy and rising household debt resulted in weak consumer spending and falling advertising expenditures (Adex). According to the Advertising Association of Thailand (AAT), Adex across all media dropped by 11% in 2014, compared with a year earlier. For the first seven months of 2015, Adex across all media improved by 24% year-on-year (y-o-y), driven mainly by the digital TV segment. However, the major portion of spending still goes to analog TV, though this portion is decreasing. Adex on analog TV is expected to gradually move to digital TV platform. Adex in the publishing segment, accounting for 9% of total Adex, dropped by 3% y-o-y in the first seven months of 2015. Due to the growing popularity of online media, advertising in the publishing segment has not grown during the past five years.
In line with the industry, NMG reported sales of Bt2,828 million in 2014, a 4% drop y-o-y. Revenue from the publishing decreased by 18% y-o-y to Bt1,386 million, reflecting the nearly saturate stage of newspapers. The broadcasting segment showed a 37% growth in revenue to Bt1,031 million, driven by the operation of NMG's two digital TV channels launched in late April 2014. For the first half of 2015, NMG's revenue was Bt1,437 million, up by 14% y-o-y. While revenue from the publishing segment declined by 4% y-o-y to Bt649 million, broadcasting revenue grew by 50% y-o-y to Bt577 million, compared with Bt385 million in 2014.
NMG's operating margin was pressured by the weak economy, a drop in revenue in the publishing segment, and a rough start for the digital TV business due to unsettled rules and regulations plus intensified competition. The operating margin (operating income before depreciation and amortization as percentage of sales) decreased from 17.9% in 2014 to 13.9% in the first half of 2015.
NMG's capital structure and liquidity remain sound. As TRIS Rating considers NMG's payment obligations for its digital TV licenses as debts adjusted with cash and cash equivalents, the adjusted net debt to capitalization ratio improved to 29.9% at the end of June 2015, from 38.1% at the end of 2014. The improved capital structure was, in part, supported by a larger equity base from warrant exercising. The fund from operation (FFO) to adjusted net debt ratio stayed at 28.4% (annualized, from the trailing 12 months) while the EBITDA interest coverage was 8.3 times for the first six months of 2015.
Under TRIS Rating's base-case projection, NMG's revenue is expected to grow by at least 8%-10% on average per annum during 2015-2018. The growth is based on the assumption that the company is able to develop or source TV contents that can increase audience share and advertising revenue on the digital TV platform. Taking into account intense competition in the digital TV business plus a slowdown in the publishing segment, TRIS rating expects NMG's operating margin to continue to be pressured for the next one to two years to stay between 15%-18%. Afterward, the revenue growth is expected to outpace cost which will improve the operating margin to over 20%. As a result, NMG is expected to generate FFO of Bt550-Bt900 million per annum during 2015-2018. At the end of June 2015, NMG had cash and cash equivalents of Bt1,169 million. The operating cash flow plus its liquidity reserve will be sufficient to serve its planned capital expenditures and liabilities due. NMG's has budgeted capital expenditures of Bt150-Bt250 million per annum, mainly to support its digital TV operation, plus digital TV license fee of Bt1,884 million payable during 2016-2018. TRIS Rating expects no substantial rise in leverage in the next 12-24 months. The ratio of adjusted net debt to capitalization is expected to stay lower than 30%.
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