Hold Sun TV Network Ltd For Target Rs. 505 - Emkay Global
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Disappoints on dividend payout
* Sun TV reported better-than-expected operating performance, with EBITDA rising 8.6% yoy. Ad revenues surprised positively by rising 8% yoy vs. our estimate of 6% decline, while domestic subscription revenue growth of 7% fared a bit poorly vs. our expectations.
* Driven by movie telecast, the viewership share for its Tamil GEC has seen a revival in Q1FY22. Upcoming content launches should help improve viewership share. Management sounded optimistic on clocking 20% domestic subscription growth in FY22.
* The steep reduction in dividend payout to 13% vs average of 49% over the last 5 years, despite cash and cash equivalents of Rs41.4bn, was a key negative. The delay in content investments in its OTT platform, Sun NXT, once again, was another negative.
* We have lowered FY22-23 EPS estimate by 3% each. Execution on sustained content spends across the channels in turn leading to market share improvement is key. Maintain Hold with a revised TP of Rs505 (12x FY23E EPS) vs. Rs541 earlier.
Lower tax and depreciation & amortization charge support bottom-line:
Revenue growth of 6.4% yoy was ahead of our estimates, driven by better-than-anticipated ad revenues, which rose 8% yoy. Subscription revenues increased 5.6% yoy, with domestic subscription revenues rising 7% yoy. On the other hand, international subscription revenues saw a 12% yoy dip, though better than our expectations.
EBITDA margin expansion of 143bps yoy to 69.9% was on the back of lower other opex and employee cost. Amortization charges in Q4 saw a sizable dip due to lower number of movie telecasts. Finance expense rose meaningfully to Rs172mn due to interest on one-off tax provision. Tax outgo for the quarter included tax related to previous years stemming from income tax disputes, which was offset by deferred tax.
Outlook:
Ad revenues reverted to positive growth trajectory after eight consecutive quarters of declines. Management was sanguine regarding the way forward and is hopeful of touching FY20 ad revenues this fiscal, while ongoing covid wave has disrupted the momentum. It also expects domestic subscription revenue growth of 20%, despite pending litigation related to the implementation of NTO 2.0. In the past, we have highlighted multiple times that consistency in content investments is crucial for viewership market share improvement, which is yet to be seen as market share for SUN TV (Tamil) has contracted considerably from 59% in Q1FY17 to 38% in Q1FY22.
Continued deferral in content spends for its OTT platform, clearly indicates weakness in this aspect and throws doubts about delivering on stated targets. Post disappointment in FY21, we are estimating rebound in dividend payout from FY22, given the strong cash position. Key risks: 1) faster market share recovery and ad growth; 2) better-than-expected subscription growth; 3) minimal impact of OTT on traditional TV in the medium term; and 4) higher-than-expected spends on the OTT platform.
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