GMA Network Full Year Results Review May 13, 2017
GMA Network reported its full year results. The company’s revenue grew by 21.5% and 14.6% without political advertisements. Its audience share fell from 38.0% to 33.9% as ABS CBN took the share lost by GMA increasing its audience share from 41.5% to 44.7%.
The company’s production costs grew by 12.0% leading to an increase in gross profit by 28.0%. GMA’s general and administrative expenses (GAEX) increased by 3.2% in 2016 allowing operating profit to increase by 69.5%.
GMA’s working capital increased by 8.0% while fixed capital decreased by 7.1% causing invested capital to decrease by 0.2%. The company’s ROIC increased from 23.2% to 39.4%.
Over the past five years, GMA increased its NOPAT by PHP1,886 and invested capital increased by PHP109 million allowing the company to generate an incremental ROIC of 1736.7%. Since 2007, the company increased its NOPAT by PHP1,342 and invested capital by PHP1,342 leading to an incremental ROIC of 100.0%.
Given the fixed costs in the industry associated with production costs, size is crucial, ABS is clear winner with an audience share advantage over GMA. GMA has a very large lead over the third place competitor TV5. ABS also produces the best content dominating the top 10 programs for some time. Operationally, GMA is much more efficient than ABS.
Per point of audience share, ABS generates much more revenue but this comes with higher production costs, other operating expenses, and assets leading to a much lower operating margin, net operating asset turnover, and ROIC.
Overall, the industry is dominated by ABS and GMA with the two companies controlling 78.5% of the industry. Given the huge fixed costs and customer captivity within the industry, it would be difficult for small players to compete with ABS and GMA. ABS larger spending on production costs absolutely and on a per audience share point and its domination of the top 10 programs in the Philippines illustrates its big lead in content production over GMA consistently dominating the top 10 programs, but GMA is operationally efficient. Given the reach of television, it is still the best place to reach a mass market and educated consumers. The internet has been taking share from more focused advertising markets of magazine and newspapers. Magazine reach niche interests while newspapers reach local markets.
The biggest threat to earnings in the future is internet distribution of content. We feel ABS and GMA are insulated as the small market size of Philippines may make international content providers pause on spending on local content. Local content producers do not have the size to produce as much content as ABS or GMA. In addition, internet penetration is low in Philippines further insulating TV from disruption.
GMA reported strong results for 2016 and currently trades on a nine-year average free cash flow yield of 10.2% and with pricing power can grow by 5% per annum leading to an expected return over 15%. We will build our position size to 4.0%.