Impatience and Post-IPO Blues

If you scan the list of the most underperforming stocks year-to-date, at least three of them have debut in the market this year. Phoenix Petroleum (PNX) topped the Loser’s club with a staggering YTD -36.47%, National Reinsurance (NRCP) ranked 10th at -20% and GMA Network, Inc. (GMA7) at -19.05%. 

I am going to talk about GMA Network, Inc. today. 

You will recall that GMA7 performed well on the first day of its listing. It went as high as P12, a quick trade on the first day would have pocketed you a 41% gain on the IPO Price. It went on to settle at 10.50 and then traded between P9 – P10.50, the month following. Interestingly enough, it went into doldrums during the middle of a global sell-off amidst worries of a possible global slowdown due to credit crunch. 

GMA Network Inc. is an entertainment, information and communications organization in the Philippines. Formerly Republic Broadcasting System, Inc. (RBS), the company was originally incorporated as a radio broadcasting station in 1950. On October 29, 1961, the company ventured into television and set up TV Channel 7, the third television station in the country. In 1974, under new management, RBS introduced a new name, GMA Radio Television Arts or GMA-7. Today the company is aggressively pursuing an expansion program that will establish a network of 54 VHF and 30 UHF television stations nationwide.

What has changed post IPO?

• The company is sitting on a P1.5 billion in cash to be used in construction of television studios, production and studio facilities and expenses to upgrade signal and strengthen presence in key cities in Visayas and Mindanao.

§         The Mega Manila ratings – the key geography drivers, has widened the gap over its nearest competitor, ABS-CBN Broadcasting (ABS). Mega Manila TV ratings data from AGB-Nielsen GMA (as shown below), which resulted to a 23 percent growth in its consolidated net income to P1.13 billion in the first half of the year from P915 million in the same period last year. Mega Manila Ratings:

• Aug. 13, Ave Primetime Rating: GMA: 42.22% vs. ABS-CBN:33.57%
• Aug. 14, Ave Primetime Rating: GMA: 31.37% vs. ABS-CBN: 24.38%
• Aug. 16, Ave Primetime Rating: GMA: 20.10% vs. ABS-CBN: 17.4%

• People have grown impatient over the slow pace of its shares in the market. Foreign holders have taken at least P9.2 million from its Philippine Depositary Receipts (PDR’s) and believed that the stock is not as sexy as other blue chips.

 Investment Thesis

• Media companies has generally has a big moat, only if there are few big players. In the Philippines, there are two media giants that own the bulk of advertising from local and multinational corporations. These types of businesses are toll types and they can charge higher advertising rates as long as they maintain the television ratings.
• GMA Network, Inc. has lesser debt, averagely pegged at 0.6 to 0.55 for a share of equity. The main reason is efficient capital allocation and conservative financing policy. In fact, capital expenditures during the past years are minimal against rival’s ABS-CBN, and are keen on incurring big operational expenses. This has allowed to the company to post solid Owner’s Earnings at P1.1 billion annually.
• Other revenue streams will include, GMA Pinoy TV whose subscriber count has more than doubled in FY06 at 126,054.  As the increasing number of Filipinos overseas grows at an annual rate of 14%, we believe subscribers will approximate 145,000 FY07E and 167,000 FY08F and will translate to at least P400M. The network has entered into carriage agreements with Comcast and DirecTV in the US, as well as distributions for 16 countries in the Middle East and 11 countries in North Africa.

Valuations     Private equities in Asia have paid 14x EV/EBITDA of media companies and if we put this figure, GMA7 should carry a private market value of P16/share, moving 2008. This would translate to a 23.32x 2008E Earnings, still a discount to a peer average of 32x for media companies.  

Catalyst

The value itself is a catalyst, as investors have shrugged off ratings leadership and strong corporate profits.

Would there be more post-IPO blues, considering that consensus believes that a quick trade in IPO will be a profitable pursuit than sitting and owning good businesses at reasonable prices? That is yet to be seen.    

Disclosures: The information contained herein is not represented or warranted as accurate, correct, complete or timely.  Material contained herein is for informational purposes only and should not be viewed to make an offer to buy or sell securities.

Buying a 150-Chain of Bakeshops.

I spent my afternoon reading Annual Reports and looking for a SEC filing that might give me an idea how much would an industrial buyer pay for a chain of restaurants. To my disappointment, the search seems to be leading me to nowhere. (Well, search engines are like that, when you type tags/keywords, chances are the matches would most likely not the ones you were looking for.)

So, I scanned my Yahoo Messenger, (Please do not try this at workplace.) hoping to catch a friend online. I have a couple of active friends there, so I IM’ed someone who might help me find the information I needed. We talked about the stock market, and yes, like most of the time, I do not have an opinion of.  So we did not bother to deal into an uncharted territory like forecasting the next move of the market. Rather, we discussed about the stocks that we like at the moment and whether the stock really deserve the current pricing of the crowd. 

We had a lengthy discussion and we bumped into valuations. My point was clear, valuations and analysis should be made simple as possible. And yes, without the aid of a spreadsheet, economic data and a lot of time on financial statements. I believe that there are at least two or three variables that you need to come up with a buy/sell decision, and the rest would be noise.

Since my friend runs a 150 Chains of Bakeshops, I was curious what his response. Yes, my friend is a serial enterpreneur and he knows business. (Disclosure: The guy is a corporate hotshot.)

I asked him, “How much would be the start-up cost of a single bakeshop?” Without an inch of hesitant, his reply was, “Ballpark figure is P1 million.”

“How many bakeshops do you own?,” I mused.

“one hundred fifty,” he said.  A quick mental calculation would lead us to a P150 million worth of bakeshop chains. 

I made a theoretical deal, “Suppose, I am sitting on huge pile of cash and I offered you, P120 million, for all of your bakeshops, will you make the deal?”

“Of course not,”  with an air of conviction he replied.

The whole point was emphasized about Value Investing though. I was the Market and I was quoting that his 150 chain of bakeshops was only worth P120 million, when in fact the real value would be P150 million.

Do you think my friend will sell just because I think that it’s only worth P120 million to me?

I would like to believe that the answer would be a resounding No.

Everyday the market quotes your businesses at a higher or lower price than today. It is up to you, whether you think it’s clever to sell a P150-million worth of business for P120-million.

Either Mr. Market or you maybe right.