This thematic paper aims to value the share price of VGI Global Public Company Limited (VGI) based on discounted cash flow valuation method, which has the concept that the share price of the company should reflect its fundamental value in terms of cash flow, growth and risk. As a result, the target price for VGI should be approximately equal to 5.41 Baht per share. share, while the current price is 5.30 Baht per share. nevertheless, the valuation is indicative for HOLD.
LIST OF ABBREVIATIONS
BTS SkyTrain BTS Silom Line and BTS Sukhumvit Line, including BTS Silom Line Extension and BTS Sukhumvit Line Extension. BTS Sukhumvit Line Consists of 17 stations (including Siam Station) with a combined track length of 17 kilometers, connecting Mo Chit Station and On Nut Station.
VALUATION
Highlights
- A new transition towards the nationwide integrated media plat- forms
- Developing an in-house digital media
- Stronghold of mass transit media leadership
- Recommendation for HOLD
VGI's current valuation with a PER of 35 times lower than the average PER of the OOH media industry and also the entire media segment (Figure 1.1). However, the current value is not favorable; therefore, we maintain our HOLD rating on the stock as there is an opportunity to increase the company's long-term growth potential due to BTS-related media, outdoor activity and other media.
Business Description
The expansion of the Bangkok Sky Train network of the Pink and Green Line, which will begin operating in 2020, could potentially provide incredible revenue streams for the company. The major shareholders; BTSC and BTS Group Public Company Limited (BTSG) accounted for 51% and 19.40% respectively, while the free float accounted for 22.65%.
Strategy
Revenue Structure
Office Buildings and Residential Buildings: Consist of digital screens installed in office building elevators or other waiting areas in office buildings such as lobbies. Office building media, especially in the elevator, are considered captive media because there is limited space. In office building media, the company was able to secure rights to 135 buildings, mainly Class A buildings in the central business district (Figure 1.4).
Target Customers
Industry Overview and Competitive Positioning
- Macro-Economic Analysis
- Industry Analysis
- Competition Analysis
1.3.2.1.1 According to the Media Agency Association of Thailand (MAAT) (Figure 1.9), 2016 continues to be a promising year for the Thai media industry. Advertising spend is expected to decline by 10 percent from the previous year due to media spend cut by top advertiser due to the morning period for King Bhumipol. The Transit Media Sector and the Outdoor Media Sector (in which the company also operates) grew by 18.5% and 11.6% respectively year-on-year (Figure 1.11). This is due to faster growth in advertising spend in OOH media over the past five years (Figure 1.12).
The OOH market has benefited from growth in the number of retail chains, malls and hypermarkets in the country and is characterized by a shift to digital out-of-home formats, which now approach 50% of spending, according to the local OOH advertising trade association (Figure 1.13). BTS Sky Train's core network ridership has increased significantly over the past 5 years from 145 million passengers to 233 million passengers in the year 2015 (Figure 1.15), representing CAGR of 10%. A remarkable change in the media outlook is the dramatic increase of digital media (a media in the form of file or digital use).
Although VGI has some similar comparisons, its market share in terms of media network and its financial performance are as in Figure 1.18 below. As the BTS Sky Train line is located in Bangkok's central business district and key commercial and residential areas, the company has competitive advantages due to its strategic location, increased viewership due to the growing number of rail mass transit passengers, and a highly effective medium that reaches the target audience directly (Figure 1.19).
Investment Summary
- An important transition to new stage of growth
- Massive investment in strategic acquisition of MACO and Rab- bit
- Developing an in-house digital media
- No. 1 mass transit stronghold
- VGI pursue organic growth inside and outside Thailand
A large loan must finance both agreements which is worth in total for approx. The rate of return is somewhat unclear at this stage, we are still cautious and conservative on how to derive the revenue model from the new business service. The Company plans an activation capability and began using a relationship with BSS Holdings Company Limited (“BSSH”) and its subsidiaries.
As a partnership with BSSH, VGI will get an online media inventory, access to "offline" data sources such as Rabbit's 5mn active card users and 2mn Carrot Reward members and "online" data sources through Rabbit Online web portal and Rabbit Line Pay app – a Joint Venture with Line. The company aims to become a one-stop, integrated online/offline media platform and enable clients to create "smarter", targeted advertising to enable customer/brand engagement across the nationwide segments. The acceleration of capacity on its existing mass transit media platform confirms the continued growth from its core business.
With exclusive rights to manage advertising space on BTS skytrain and extension lines until 2029 and beyond, secures the revenue stream to VGI for a long-term period. Including the acquired interest in MACO and AERO media contributing the positive organic growth from main revenue source in other media platforms for direct LED billboard, mega LED, E-Poster, office and apartment building and airports across the country. .
Valuation (Multiples Method)
- Target Price based on a Discounted Cash Flow Model – Free Cash Flow to Firm, FCFF
- Discounted Cash Flow Model: Free Cash Flow to Firm (FCFF) This method is suitable for VGI as the company has low level on the lev-
- Strong and increasing margins
- SG&A grows in line with sales revenue
- Capital expenditure, CAPEX
- Terminal Value
- Weighted average cost of capital, WACC
- Target Price is THB 5.41
- Sensitivity Analysis
The company's growth outlook reflects the free cash flow value of the company and accounts for future growth as well as a long-term perspective. With the trend and the company historical data shows the percentage in 2% and 11% in selling cost and administrative expenses respectively. However, since the company has to consolidate the financial statement with MACO from this year, the average growth rate of SG&B will increase slightly by 1% from 9% to 10%.
Trend and historical data lead us to believe that the company is able to strictly control these SG&A expenses in line with operating expenses. In addition, there will be CAPEX for the company's management, with an expected value of approximately THB 150 million per year over the next five years. The perpetual 5% growth is organic growth of the company only in terms of BTS-related revenue.
According to the 3.0% expected of Thailand's GDP in the next 5 years by the International Monetary Fund (IMF), we are confident that the selling price will not be negative and the company will be able to achieve 5% perpetual growth . Our base case assumed a weighted average cost of capital of 8.49% for a share price of THB 5.41.
Financial Analysis
- Earnings
- Cash Flow
- Balance Sheet & Financing
- Common size analysis
- Trend analysis
- Financial Ratio Analysis
Nevertheless, the company was able to overcome by improving its gross profit margin year on year, reflecting the effective cost of service management which reduced from 45 percent in FY2015 to 37 percent in 2016 (Figure 1.29). Since there was cash surplus in cash flow, the company decided to repay short-term loan and paid dividend more than the target of 50 percent (Figure 1.30). The company decided to go for loans to finance the deal, as a result short term debt increased from previous year.
Both current ratio and quick ratio have been managed well (current ratio approaching 1 to above), except in FY2015, when the company had filled with short-term loans from acquisition of new business. From the graph below, we can suggest that the company burdened more on long-term assets by 73 percent, while current assets accounted for only 27 percent. Cost of sales also had a similar trend with revenue, which benefits the company that sales and cost of sales move in the same direction.
ROA and ROE have decreased over the years. This may be the reason that the asset's capacity has not been fully utilized; the large investment in personal protective equipment cannot yield the desired return (figure 1.38). Long-term solvency risk was in a very good state as there was no leverage and a high TIE, meaning the company had much more than enough borrowing capacity to utilize (Figure 1.39).
Investment Risk
- Main revenue contribution rely on few business partner (BTSC) Since core revenue contribution mainly driven by BTS business related
- Reliance on media agencies
- Massive borrowing for M&A
- Media business varies by the overall economic situation
- Competition with other media service providers
- Change in advertising law
Plan B short-term liquidity was in good condition at the end of 2015, even though previous year looked bad, ratio below 1. Long-term solvency risk had lower ability than VGI comparing TIE rate of 41 times while VGI had 89 times. The burden on interest expenses can have an impact on the company's profit during the loan term.
The country's economic uncertainty plays an important role in determining the mood of media spending due to various uncertainties such as political uncertainty of low credibility of military government, no foreseeable election coming. Location is the first place for competition in which the pricing power of media provider is determined. The company may be overtaken by other competitors if it does not respond to the customer's requirement in a timely and cost-effective manner.
Media control rule and regulation introduced by the government that could affect the way a company does business, ie.
DATA
- VGI Business Structure
- SWOT Analysis
- Strengths
- Weakness
- Opportunities
- Threat
- Five Forces Analysis
- Bargaining Power of buyer (High)
- Bargaining Power of Supplier (Moderate)
- Threat of New Entrance (Low)
- Threat of Substitute Product or Service (High)
- Rivalry among Existing competitors (High)
- Corporate Governance and Management Practices
- Right of Shareholders
- Equitable Treatment of Shareholders
- Awareness of the Role of Stakeholders
- Information Disclosure and Transparency
- Responsibilities of the Board of Directors
- Income Statement
- Balance Sheet
- Statement of Cash Flow
- Financial Ratios
- Peer’s Comparison-PLANB
- Common size Analysis-VGI vs PlanB
- Trend Analysis -VGI vs PlanB
The company's customers can be divided into two groups, the agency group and the owners of products and services. This leads to high maintenance costs and a lack of knowledge and skills of the company's staff to take care of the system. The company's corporate governance policy is divided into 5 sections as follows: (1) Shareholders' rights (2) Equal treatment of shareholders (3) Awareness of the role of stakeholders (4) Information disclosure and transparency (5) Responsibilities of the board of directors.
The Company emphasizes the rights of shareholders as the real owner of the Company. The Company also arranges the company's auditors to present at the Annual General Meeting of Shareholders the agenda for the approval of the Company's financial statements. The Company also publishes the invitation along with supporting documents on the Company's website in advance.
The minutes from the general meeting are submitted to the board within 14 days and published on the company's website. The Company will publish such criteria on the Company's website and publish a notice on SET's website. The Company will also publish the invitation and proxy forms together with details and procedures on the Company's website.
The Board of Directors, the Audit Committee, the Executive Committee and the Nomination and Remuneration Committee of the Company will review and study the guidelines for the supervision and management of the Company.
