Fair value of movie distributor upgraded to Bt17.10 

We've revised up our 2003 earnings forecast for CVD Entertainment (CVD) from Bt27mn to Bt62mn this year to reflect the company's improving performance.

The company's earnings growth prospects are being driven by strong sales growth from its price-reduction scheme, the pick-up in consumer spending, numerous Hollywood blockbuster movies, the government's recent crack-down on pirate VCDs and CVD's divestment of two loss-making units.

The company is debt free, with net cash of Bt242mn or Bt6.7/share. CVD is expected to resume dividend payments in 2004 after wiping out all retained losses this year.

Furthermore, CVD shares are attractively priced, trading on a prospective PER of 7.35x. Given expectations of further recovery in earnings over the next couple of years, we believe the stock deserves to trade on a 2003 PER of 10x, or about half of the rating for other entertainment stocks. With a potential 36% upside to our revised fair value of Bt17.10, CVD is recommended as a BUY.

CVD earnings summary

As of	Net Profit	Growth	EPS	PER	EV/EBITDA	P/BV	P/SALES
Dec.	(Bt mn)		(Bt)	(x)	(x)	(x)	(x)
2000	4	N.A.	0.11	118.30	2.59	0.47	0.32
2001	(216)	(5723%)	(5.99)	N.A.	2.07	0.60	0.40
2002	(68)	N.A.	(1.89)	N.A.	1.42	0.66	0.42
2003F	62	N.A.	1.71	7.35	1.03	0.61	0.43
2004F	77	25%	2.15	5.86	1.76	0.57	0.40
2005F	83	7%	2.29	5.49	2.52	0.54	0.37

Source : Kim Eng Research

• Following the divestment of its video rental business and closure of its VHS cassette production plant last year, CVD will be able to concentrate on its core business – obtaining exclusive distribution rights to movies, contracting for the manufacture of VCDs/DVDs and distributing the movies to retailers throughout Thailand. The company has signed contracts with almost all major studios including Warner, Columbia, Buena Vista, Fox and DreamWorks. This year, CVD will also focus on obtaining rights to independently produced movies with lower licensing costs.

• CVD's sales this year are forecast to drop slightly from 2002. This is the result of the disposal of the two businesses. Meanwhile, we should see further improvement in the company's VCD/DVD distribution income. Last year's scheme to dramatically cut prices to fight against piracy has proven very successful with both CVD and the major studios making substantially larger income from higher volume sales. The company is also benefiting from the government's recent crack down on pirated VCDs/DVDs. According to industry analysts, the number of major movie releases are expected to increase to 220-230 this year, up from 205 last year.

• After completely shutting down its own 40 retail shops, CVD's selling and administration expense is projected to fall to 27% of sales this year. With margins improving, we are projecting that CVD will turn in a net profit of Bt62mn (Bt1.71/share).

• CVD is in a healthy financial position with net cash of Bt242mn or Bt6.7/share. The company plans to wipe out its retained loss of Bt638mn with a Bt954mn reduction in its share premium account. After completing this, CVD will be able to resume dividend payments for the first time in five years. Based on a 50% pay out ratio, we expect CVD to pay a dividend of Bt0.86/share in 2004.

Source : Kim Eng Research