SCMA: Kinerja dan prospek usaha Surya Citra Media (21/10/2016)

Logo SCMDear Mr Anto,

By way of introduction my name is Mr Olle Wennerdahl and I am head of investor relations at SCMA and parent company EMTK.

Thank you for your email with questions that I am happy to try my best to answer. I shall provide written answers below, in your email.

Please don’t hesitate to write to me again if you have additional questions.

Thank you,

Olle Wennerdahl

On 21 Oct 2016, at 16:41, Ali Anto <alianto.chan@gmail.com> wrote:

Dear Mr. Iskandar,

I was informed that bahasa Indonesia isn’t your strong languange, hence I try to email you in English instead. Hopefully you are able to assist me with several questions (well quite a few actually) I have in regards to SCM’s business prospects (stock code SCMA).

First, let me introduce my self. My name is Alianto Chan. I’m a retail investor and a member of stock community “Saham Indonesia”. We have quite a few members from our community who own stocks in SCM. Hence, we are hoping to get to know SCM a little better in terms of company business model, performance and future prospects.

By the way, congratulations to SCM’s super performance over the past one decade. Revenue CAGR is 15%, Net Income CARG is 37%, and free cash flow has consistently been fabulous and fantastic and is above industrial and national average. It is one of the very best companies we have come across so far and many of our members are looking at adding more of SCM’s stock to our investment portfolio.

Anyway, below is the list of my questions, and I hope you find the time to write back with responses.

1. Revenue CAGR is 15% over the past 10 years, it has then improved to 17% over the last 5 years, but if we are looking at Revenue CAGR over the last 3 years it is 25%. What is the main reason for such acceleration in revenue growth in recent years as opposed to competitors performances?

This was due to the acquisition and turn around of TV network Indosiar in mid-2013, whose market position we have improved from no 6 to no 3 (overall) and to no 1 in the variety and entertainment segment, with shows such as D Academy, etc. Indosiar’s high growth, coupled with SCTV going from no 2 to no 1 in prime time audience share from April 2014 to September 2016 increased the growth rate.

2. Since 3rd quarter 2015, revenue growth has been slow. Will this trend be carried towards 2nd half of 2016? What is the main reason for such slowdown (3Q15 to 1Q16)?

3Q15 was slow due general slow down caused by the depreciation of IDR to USD (mid-2013 onwards but not obvious due to audience share improvements at both of our channels during this time) as well as global macro issues (fear of rising US interest rates) and some political instability in Indonesia post President Jokowi’s election.

From January 2016 onwards revenue growth has been muted due to falling prime time audience share at flagship channel, SCTV. In fact it has registered -2.8% top line whereas Indosiar has registered +23.3% in 1H 2016.

Since Q315 local FMCG companies have increased ad spend (as IDR strengthened from 16,000 to 13,000 per USD) but multinationals such as UNVR etc have not followed suit. We expect this to remain the case for the rest of 2016. We hope that in 2017 even the multinationals will also increase budgets allowing for greater market growth. But this is not certain yet.

3. From research data, company’s FTA TV viewers have dropped from 29% in end of 2015 to 25% in Sept 2016. What has caused such drop and what strategy will company undertake to boost viewer’s market share?

SCTV lost share during this time period. This was caused by a corresponding increase in prime time audience share at RCTI. SCTV and rcti compete head to head in prime time sinetron space. They have outperformed at the same time as our production houses have not been performing as well as they did in the previous 2 years.

To improve we have hired new staff on the creative side and also bought shows from 3rd parties (usually we produce our own sinetron). To date this has not had the desired effect so we will continue to invest in Human Resources to regain our previous ratings.

4. Company’s free cash flow has been superbly fantastic. Does company have any plan for business acquisition in the near future considering FTA TV industry in Indonesia is largely controlled by oligopoly of 4 major parties, and SCM (2 TV stations) comes in 2nd after MCN (3 TV stations) in terms of total viewers. Or free cash will mostly be used to reward investors in the form of dividends?

We have no current plans to acquire additional FTA TV stations either here or abroad. Thus we will continue to maintain a dividend payout ratio (to NPAT) of minimum 70% p.a. Perhaps we make some smaller investments in digital or production assets but nothing decided as yet.

5. From research data, in 2020 online media ads contribution will grow from currently 9% to 21%, whereas contribution from TV ads will drop from 67% to 58%. How will this affect company’s future performance and what strategy does company have to counter the possibility of losing more market shares?

Most of the online growth will come at expense of news papers, magazines and radio. And as TV’s share of total ad expenditure falls as you highlight, total ad ex continues to grow year by year. Currently ad ex to GDP in Indonesia stands at 0.2%. ASEAN average is 0.4%. Thus it is likely that’s as ad ex to GDP catches up with the ASEAN average , that in IDR terms, 58% of future ad ex will be greater than the current 67%.

Additionally SCMA has transitioned from being a broadcaster to being a broadcaster with a very large and strong content production capacity. We currently own 3 production houses, being;
Screenplay Produksi (for sinetron, TV movies, cinema movies and movies for internet companies, such as Netflix and iflix.
Amanga Surga Productions (for sinetron).
Animasi Kartun Indonesia (animated series for TV)

With the spread of internet TV, growing number of cinema screens etc, we aim to add content revenue to the mix instead of only advertising revenue.

6. Many of SCM’s broadcasting licenses are due to expire in 2016 and 2017, how easily is it to get broadcasting licenses renewed? And will the renewal incur heavy one time fee? How does the whole process work?

Both of our TV licenses were renewed last Friday. Same for the other 8 national FTA TV stations. I can give more details later in a follow up email.

7. What are the top and bottom line targets set for 2016? How is current performance measured?

Top line target is 8% this year. We do not provide bottom line guidance.

Performance is measure in terms of ROE, ROC, Gross profit margin, EBITDA margin, free cash flow and dividend plus SCMA’s market share relative to competitors.

8. Last but not least, even though SCM only holds 2nd place in terms of total viewers, but SCM fundamental is ranked no.1 in the industry beating even MNC by far in terms of margins and growth for many years. Why is it so? How can SCM manage to be so efficient? what are the lasting competitive advantages SCM has over its peers?

This is actually quite simple to answer; since 2010 we make most of our sinetron and tv films ourselves, as well as our live TV shows on Indosiar such as D academy and Stand up comedy academy etc. This is less expensive than buying them from independent 3rd parties, which is for the most part what MNCN does. Hence we have higher GPM. Furthermore we have avoided high leverage and USD cost exposure allowing us to have a strong balance sheet and free cash flow generation and higher NPAT margin.

Thank you Mr. Iskandar for your time and willingness to response. Looking forward to hearing from you.

Best regards,

Alianto Chan