TRIS Rating has downgraded the company rating of Nation Multimedia Group PLC (NMG) to “BBB” from “BBB+”. At the same time, TRIS Rating has revised the rating outlook of NMG from “stable” to “negative”. The downgrade reflects NMG’s weakened operating performance and financial profile, from the result of intense competition in the digital television (TV) industry and the secular decline in the publishing segment. The rating continues to reflect NMG’s established brand equity and market position as a leading multimedia news content provider. The outlook revision to “negative” reflects TRIS Rating’s view that NMG’s profitability will remain weak in the near term. NMG’s operating performance could improve, over longer term, if NMG can successfully implement a business model better suited to capture the revenues from NMG's online sources or if NMG is capable of monetizing its competitive edge in the digital TV segment more efficiently. However, the timing of these positive developments is uncertain.
The “negative” outlook reflects the pressure on NMG's operating performance in both the digital TV and the publishing segments. The rating could be downgraded if operating losses continue and further deteriorate the financial profile. The rating could be revised upward if the company is able to deliver stronger-than-expected operating performance and make material increases in operating cash flow, boosting its liquidity position.
NMG, widely-known and recognized as the Nation Group, is a leading multimedia company in Thailand. As of May 2016, NMG’s major shareholders were News Network Corporation PLC, holding a 9.96% stake, Digital Sky Holdings Ltd. (9.64%), Mr. Siriwat Wongjarukorn (8.60%), and U City PLC (8.15%). NMG’s lines of business include publishing, broadcasting, edutainment, education, printing, and logistics. The broadcasting and the publishing segments are the main revenue generators, contributing 44% and 43% of total revenue in 2015, respectively.
NMG’s main source of revenue is advertising, which fluctuates in tandem with economic conditions. According to the Advertising Association of Thailand (AAT), advertising expenditures (Adex) across all media grew by 3.3% in 2015, compared with a year earlier. The rise was mainly driven by the full year operation of the digital TV network. However, for the first eight months of 2016, Adex across all media dropped by 6% year-on-year (y-o-y) to Bt76.9 billion, reflecting ongoing slowdown of the domestic economy and weak consumer spending. While Adex on digital TV grew by 4.8% y-o-y, Adex in the publishing segment dropped by 17.9% y-o-y, mirroring the persistent fall in the popularity of printed newspapers.
In 2015, NMG recorded a 7% y-o-y rise in sales to Bt3,015 million, driven mainly by the full year operation of its two digital TV channels. For the first six months of 2016. NMG's performance was hurt by the economic slowdown and sluggish advertising spending. The secular decline in the publishing segment and a weaker-than-expected performance in the digital TV segment caused revenue to drop by 21% y-o-y to Bt1,138 million. In the first half of 2016, revenue from the publishing segment declined by 21% y-o-y to Bt512 million while revenue from the broadcasting segment dropped by 24% y-o-y to Bt439 million. Because of the drop in revenue, NMG posted a Bt342 million net loss from operations for the first six months of 2016. The loss included a one-time provision for inventory obsolescence of Bt193 million and Bt45 million in interest expense on digital TV license payable due to implementation of a new accounting standard.
Going forward, TRIS Rating expects revenue from NMG's publishing segment will continue to decline at a high-single-digit percentage rate yearly, as media users switch to online media. However, the drop in publishing revenue is expected to be offset, in part, by NMG's established online media platforms. Performance in the digital TV segment is expected to be pressured by intense competition from other broadcasters and from other platforms, such as video-on-demand, reflecting ongoing changes in viewer’s behavior. These are the main factors keeping advertising rates in the digital TV segment lower than previously expected. There is talk in the industry that some digital TV broadcasters might not be able to bear ongoing operating losses over the next 1-2 years and may have to shut down. If some competitors exit the industry, the competitive intensity may lessen somewhat. However, content quality is a crucial factor needed to attract viewers and advertising revenue.
Under TRIS Rating's base case scenario, NMG is expected to report operating losses in 2016-2017, taking into account the intense competition in the digital TV industry plus the ongoing decline in the publishing segment. However, if the economy rebounds or NMG capitalizes on its ability to source or produce contents that captures a solid viewer base and a revenue stream in the digital TV segment, NMG’s operating performance is expected to improve after 2017. As reported by AGB Nielsen Media Research (Thailand), NMG's NOW channel has continuously improved in terms of ratings and audience share since October 2015 after repositioning itself as a documentary TV channel. TRIS Rating expects the company to translate the larger viewership base into higher advertising rates. Nation TV channel is expected to maintain its competitive position as a leading news channel and generate earnings. Rises in revenue are expected to outpace rises in costs, meaning the operating margin (operating income before depreciation and amortization as percentage of sales) is expected to improve to a mid-teens percentage in 2018-2019. These translate into funds from operations (FFO) of Bt250-Bt400 million per annum during 2017-2019.
NMG's capital structure and liquidity have deteriorated recently due to its weaker operating performance. TRIS Rating considers NMG's payment obligations for its digital TV licenses as debts. When adjusted by the amount of cash and cash equivalents on NMG's balance sheet, the adjusted net debt to capitalization ratio weakened from 29.64% at the end of 2015 to 36.88% at the end of June 2016. Due to the ongoing losses, the FFO to adjusted net debt ratio weakened from 26.62% in 2015 to -13.85% (annualized, from the trailing 12 months) for the first six months of 2016.
Over the next 12-18 months, NMG's liquidity will remain tight as long as its operating performance remains weak. Liquidity sources are expected FFO of Bt180-Bt250 million and cash and cash equivalents of Bt741 million as of June 2016. The uses of funds are expected capital expenditures and TV content acquisition costs of Bt130-Bt200 million, digital TV license fees of Bt648 million, and debt repayments of Bt620-Bt680 million. NMG needs new borrowings to improve liquidity. The ratio of adjusted net debt to capitalization is expected to stay at 40%-45%.
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