Earnings upgraded to reflect promising prospects

We are positive on GMM Grammy's (GRAMMY) future earnings prospects and have revised up our forecast for 2003 by 8% and 2004 by 11%. This year's earnings growth is expected to be driven by rising music sales, shut down of loss-making operations in Taiwan, improving TV ad income from the addition of new programmes and higher income from movie production business. The company's margins should also improve as a result of GRAMMY shift towards the production of its own CDs and VCDs. Based on these factors, we are now forecasting GRAMMY to achieve earnings growth in 2003 of 18% to Bt781mn, or Bt1.56/share.

Grammy is also attractive as a dividend play. The company recently announced a Bt1.5 final dividend to be paid on May 6 (share registry closes on April 8). This, together with an interim dividend of Bt0.5, raises the company's full-year dividend to Bt2.0, or a 9.95% yield at the current share price. However, we don't think that GRAMMY will maintain a dividend payout from this year's operations in excess of 100% of EPS.

The stock is trading on PER of 12.9x or a 24% discount to our fair value estimate of Bt26.60. We are maintaining our BUY rating on GRAMMY.

GRAMMY earnings summary

Source : Kim Eng Research

• GRAMMY's local music business showed substantial growth in 2002 of 22%. Even with a 5% reduction in the number of albums to 198 units (120 new albums and 78 compilations), the company's unit sales grew 16% to 45.5mn units. This is due to a 49% and 168% jump in CDs and VCDs sales in volume terms, driven by a price-cutting scheme adopted in August 2001 as well as very successful album sales of new albums by Bird, Palapon, 2002 Ratri and a few other artists. In terms of revenues, the product mix has rapidly shifting from tape to VCD (from 51:22 to 31:43).

• In order to improve margins, GRAMMY began to produce its own CDs and VCDs last year by installing two new machines in July and another two in November. By the end of last year, the company was producing about 30% of its own requirement, which we believe is saving GRAMMY about Bt30mn/year. According to management, the company will add at least another two production machines later this year.

• GRAMMY's Taiwan music business still generated a loss of Bt102mn in 2002 even though the company tried to apply a conservative strategy of reducing the number of album launches and improving cost control. GRAMMY has decided to divest this business within this month. For the base case, the company estimates a book gain of Bt50mn on the asset sales. In the worst case, the business will be shut down without sale of assets. The management expects its Taiwan operation to make less than NT$30mn in 1Q03.

• We are see significant growth this year in GRAMMY's media businesses, particularly TV, radio and publishing. TV revenues are projected to rise on the back of new programmes to be added in early 2003 and more time slots on Channel 3 and Channel 7. Also, GRAMMY will receive full-year revenues from five TV programmes (mostly game shows) added late last year. The is preparing to launch up to 10 new magazines this year, including magazine for gentlemen, women, travelling, entertainment, health, etc. On the radio side, GRAMMY is benefiting from the growth in industry ad spending and the fact that its five radio stations continue to be very popular.

• After the success of last year's Mekong Full Moon Party movie, the company plans to release 10 featured films this year with expected income of Bt381mn. The company will also launch 20 movie VCDs for the home entertainment market.

• GRAMMY's Internet unit reached breakeven in 1Q02 and is expected to perform well this year given a boom in ringtone and logo downloads to mobile phones.

Source : Kim Eng Research