ABS – Wait and See

ABS set a new 52-week low as of December 12, 2017 trading session when it reached 34.75. Over this period, the share price is down 21.56%.  Although, the shares is at lowest during the 52-week period, we cannot recommend to buy or sell the same at the moment.  The following is a discussion of why we do not recommend to buy or sell it in the meantime.

 

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We are in the period of technological disruption.  Broadcast is no longer the prime platform for news, information and entertainment as it was in the 1990s.  The internet and mobile has replaced broadcast as the primary go-to place for news, information and entertainment.  In the advent of mobile internet, people now spend more time on their computers and mobile devices than in their television sets.  This technological sea change is most evident in the recent elections in the Philippines and in the US, where information proliferated in the internet more particularly in the social networking sites impacted the elections more than the mainstream broadcast media outlets.

ABS is the local broadcast giant. For the 9-month period of 2017, 52% of the revenue of ABS came from advertising revenue from its broadcast unit.  The said revenue provides virtually all of the net income of ABS of 2.3 Billion.  As what has been said there is a technological sea change in the telecommunications and media industry and this technological disruption gradually erodes the revenue of ABS.  In the 9-month period of 2017 advertising revenue of ABS is down 517 Million or 3% lower year-on-year.

The technological disruption affecting ABS’ business would be a convenient reason to recommend to sell it but we do not.  First, ABS is generating positive operating cash flows and free cash flows.  EBITDA for 2016 was 9.85 Billion and for 9-month period 2017 EBITDA is 7.03 Billion.  Second, ABS is the local leader in content creation and content is still king.  ABS has invested in capabilities to create local content.  It has Star Magic, ABS-CBN University and it has invested in studios and sound stages.  Its capabilities to create world class content is hard to replicate.  Third, it has been doing something to mitigate the effects of disruption.  It has gradually balanced advertisement revenue with consumer sales.   This endeavor of ABS, makes-up our reason to recommend to wait and see before recommending buying or selling it.

ABS is doing something to mitigate the effect of technological disruption.  It ventured into mobile telecommunications with ABSCBNmobile.  So far, this venture has not been profitable.  Another venture is Kidzania, which in the meantime has also not been so profitable.  Its cable, satellite and broadband distribution platform has not provide meaningful contribution to the bottom line.  To us the more promising investments ABS have made is its investments in digital and interactive media more specifically in Iwanttv and TFC.tv.

ABS, no doubt, has great catalog of great contents and has the ability to create best-in-class content.  In the age of broadcast erosion and internet dominance, ABS must find a way to sell its content directly to the consumers as what Netflix is doing. We believe, Iwanttv and TFC.tv are steps in the right direction.  Presently, there contributions to the bottom line is insignificant.  This is so because Iwanttv and TFC.tv are not world-class.  They are mediocre platforms.  The challenge of ABS is to make Iwanttv and TFC.tv world-class.  Those platforms should be like Netflix, Amazon Prime, Fox Plus or NBA Game Time.

ABS has word-class content creation capabilities.  Content capabilities would be not so valuable if it does not have a world-class delivery platform to its consumers where consumers can actually enjoy the content and pay for it.  In the meantime, ABS has a cash pile and positive operating cash flows.  With its cash pile let us wait for few more periods to see whether ABS will be able to build a world-class internet delivery platform direct to consumers as a hedge to the declining broadcast business . Let us wait and see then.

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One thought on “ABS – Wait and See

  1. In a Business Mirror article dated December 7, 2017 and titled ” BDO gears up for seamless services via newer technology,” ABS’ Chief Strategy Officer Raymund Miranda said that while the trend is really toward digital and change is inevitable, some things remain the same.

    Stressing further his point, he commented as follows:

    “Netflix would have not been the Netflix that we know now without House of Cards. So when I say that, it is still about good stories, great characters, good story-telling. People will follow the content,” he added.

    Miranda argued that content trumps the platform. We beg to disagree with him. The following is a discussion on why we disagree with him.

    Miranda is very wrong in concluding that Netflix became Netflix because of the House of Card. Netflix became Netflix because it has created a digital platform of delivering content relevant to the subscribers. Netflix’s strategy has been clearly discussed in an article dated April 5, 2017 titled “The unique strategy Netflix deployed to reach 90 million worldwide subscribers” appearing at the thecoversation.com. A portion of the article is reprinted as follows:

    “Yet Netflix doesn’t try to offer content geared to a single audience with a specific interest. Nor does it aim for a mass audience. So how does Netflix – with its 93 million subscribers – pull it off?

    Netflix has adopted what I call a “conglomerated niche” strategy: It develops programs for a handful of – maybe a dozen – different audience interests. These include complicated serial dramas (“House of Cards”), action series (“Daredevil”), horror series (“Hemlock Grove”) and exclusive films starring a popular actor (Adam Sandler).

    This is possible only because internet distribution allows Netflix to serve those different audiences simultaneously and separately. Most Netflix subscribers might not even realize how many programs Netflix offers, since its subscribers usually aren’t exposed to programs that they probably won’t be interested in.

    Netflix can also do this because internet distribution enables it to gather extensive data about its subscribers’ behavior, which it then uses to cultivate its library and provide users with likely desired content. Netflix is notoriously tight-lipped about what data it collects, but its ability to gather viewing data from a global audience has enabled the service to recognize micro-genres and then patterns of viewer interest.

    If you were to ask different Netflix subscribers about the service’s brand, you’d likely get different responses. There is no one Netflix; rather, think of it as an expansive library with many small nooks and rooms. Most subscribers never wander floor to floor. Instead, they stay in the corner that matches their tastes.”

    ABS’ Miranda still has traditional broadcast mindset. He just want to stuffed the iwantv platform of ABS with content thinking that by doing it people will just follow it and consume it just like the old tv days. And this strategy of ABS’ has been confirmed in a news article appearing in Philstar.com dated December 5, 2017 and titled “ABS launches new digital shows.” ABS is seeking a mass audience for its digital platform as if the platform is advertising supported.

    If the strategy of ABS will continue, then it ABS will just be another media company and it will be valued as such. ABS should emulate Netflix. ABS should invest to make its digital platform best-in class similar to that of Netflix. Its platform should not just be a digital catalog of contents it had created. The platform should be intelligent so as to determine the preferences of its subscribers. It should be able to curate content for individual subscribers based on their preferences and habits.

    In the meantime, we still maintain our recommendation to wait and see. In the 3Q 2017 presentation of ABS, of the total Capex of ABS of 6.8 Billion, 3.6 Billion has been spent on digital initiatives. Perhaps, ABS is investing in its digital platform. Let us see what this investments are and their outcomes. So far iwantv has been decent.

    As of December 11, 2017 trading, ABS went to a day low price of 34.45. Don’t sell yet, ABS can still make a turnaround.

    Liked by 1 person

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