Indonesia Media: Limited impact from new social restrictions; downgrading SCMA on valuation

We expect the government’s new social restrictions to only minimally impact both the content production schedules of MNCN and SCMA as well as the recovery trajectory of the industry’s ad spend. We maintain our Overweight rating with MNCN as our sector pick.

Broadcasters see minimum impact from latest restrictions. The Jakarta Employment Agency (Badan Kepegawaian Daerah/BKD Jakarta) has issued a new circular mandating 75% of Greater Jakarta’s office workforce to work from home from 18 December to 8 January. We expect the measure to have a limited impact on the content production schedules of both MNCN and SCMA given: 1) the 800,000sqm studio network owned by MNCN, 2) the resumption of the aggressive content re-run strategy by SCMA, and 3) that December is the historical ‘low season’ for FTA broadcasters – with fewer live events and scaled down crews and smaller studio audiences.

Consumption spending should remain secure, translating to stable ad spend. Other than workplace restrictions, malls in Greater Jakarta, East, West, and Central Java will be prohibited from operating beyond 7PM or 8PM during the 3-week period. Ad spend during 4Q20 is likely to remain stable despite the mall curfews, supported by the 9 December regional elections (Pilkada), which have normally resulted in faster disbursement of government social programs. Any negative impact from reduced consumption spending, in our view, should only be reflected in the 1Q21 earnings, by which time the return of live events such as SCMA’s Liga 1 should offset any ad spend reduction from December.

Soap opera competition intensifies. MNCN’s latest soap opera title, Ikatan Cinta, achieved a Nielsen TVR of 10.0 and remained #1 on Nielsen’s program rankings as of 15 December, while SCMA’s Cinta Mulia stood at #4. MNCN’s program has captured audience shares of a record 43% for prime-time and 37% for all-time, which benefits from the new social restrictions as peers have fewer opportunities to conduct live events and challenge its audience share.

Reaffirm Overweight; MNCN remains our sector pick. We maintain our Overweight stance on Indonesia Media as we expect the consumption recovery trajectory to remain intact and enable MNCN and SCMA to raise rate cards by 2H21. We reaffirm our BUY rating for MNCN with an unchanged 50/50 blended DCF- and PER multiple-based 12M TP of IDR1,600 (unchanged target PER of 8.9x [a 3-year mean] and WACC of 11.9%). We adjust our target PER multiple for SCMA’s blended DCF- and PER multiple-based valuation to 28.3x (previously 22.3x), or +1SD of its 3-year mean, to account for the market’s positive sentiment for the company’s ongoing share buyback program,), and maintain the WACC at 10.8%. We arrive at a higher 12M TP of IDR2,130 (previously IDR1,730); given the limited upside, we downgrade the rating to HOLD. MNCN is our preferred pick due to its: 1) resilient audience shares on a consistent production schedule, 2) lower capex intensity vs. SCMA, and 3) 69% PER discount vs. SCMA (3-year mean: 50.3%). Key risks: 1) extended delays to sporting events, 2) higher-than-expected FMCG raw material prices, and 3) a slower-than-expected aggregate consumption recovery.