Something Is Amiss in GMA Network's Valuation

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- By Mark Yu

(GMA Network, Company website)

A couple of weeks ago, the second-most watched Philippine television (TV) network announced its quarterly results. GMA Network (PHS:GMA7) reported a 33% increase in its sales to 4.86 billion Philippine pesos ($103.96 million) and 97.7% growth in profits to 1.37 billion pesos. According to GMA Network, the recent outstanding performance of its business operations was buoyed by the windfall from the recently concluded national and local elections in addition to its regular operations.


Also, the media company recorded a milestone in April when it earned 1.8 billion pesos in one month alone. The country's presidential election was held a month later on May 9. Deducting the political advertisements that took place in the quarter, the company still recorded a 10% growth in its overall sales for the quarter year over year.

Nonetheless, GMA's share price reacted flat, having changed just -0.16%, at market close the following day. Further, Bloomberg valuation revealed a trailing 12-month (ttm) price-earnings (P/E) valuation of just 0.43 times and price-sales (P/S) ratio of 0.12 times.

These valuations presented rather a pleasant surprise especially when GMA's juicy ttm dividend yield of 6.3% is included in the picture.

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(Actress Marian Rivera, GMA Network)

GMA Network

GMA Network was founded on March 1, 1950, 66 years ago, by Robert "Uncle Bob" Stewart. The media company aired its first television broadcast 11 years later on Oct. 29, 1961.

In its recent annual filing, GMA Network described itself as a free-to-air broadcasting company principally engaged in TV and radio broadcasting for both domestic and international audiences. Further, the media company derives the majority of its revenues from advertising related to TV broadcasting. As of 2015, GMA had 11 subsidiaries and five joint ventures and affiliates. The media company also operated 53 different TV stations nationwide and 21 radio stations.

In 2015, GMA reported that it had the leading market share among its peers, including its closest competitor - ABS-CBN. In contrast, I discussed ABS-CBN and how it claimed to be the leading media network in terms of its source. As I found out, ABS-CBN uses Kantar Media to report its audience share while GMA uses Nielsen Television Audience Measurement.

For simplicity, I would stick to Kantar Media as the market research firm claimed itself to be responsible for audience measurement of TV ratings for the entire Philippines.

(Actress Jennylyn Mercado, Image Source)

As of July, ABS-CBN maintained its lead in nationwide TV ratings with 47% TV audience share. GMA, meanwhile, ranked second with 32% share.

(Joel Marcelo Gozon Jimenez, GMA board director since 2002, Image Source)

GMA Network major shareholders

Common share ownership

As of March, 25% (846 million shares outstanding) of GMA Network is owned by GMA Holdings. GMA Holdings is 99% owned by three individuals - Gilberto R. Duavit Jr., Felipe L. Gozon and Joel Marcelo G. Jimenez.

(Gilberto R. Duavit Jr., GMA president/chief operating officer since 2010, board director since 1999, Image Source)

Also, 23.5% and 20.7% of the media network are owned by Group Management & Development Inc. and FLG Management & Development Corporation. Another company, M.A. Jimenez Enterprises, owned 13.49% of GMA. There were not many discussions regarding any of these companies in the annual filing.

(Felipe L. Gozon, GMA chief executive officer since 2000, board director since 1975, Image Source)

Nonetheless, GMA Network revealed that the board of directors of Group Management & Development had authorized Duavit to vote on the common and preferred shares of the company in GMA Network. The same tasks are to be carried by Gozon for FLG Management & Development, and Jimenez and/or Laura J. Westfall will represent M.A. Jimenez Enterprises.

Preferred share ownership

When it came to preferred share ownership, the three major common shareholders also owned the majority of the preferreds. As of 2015, Group Management & Development Inc., FLG Management & Development Corporation and M.A. Jimenez Enterprises owned 35%, 29% and 20% of GMA preferred shares.

Executive compensations

According to GMA's filings, its top five executives had earned 178 million pesos or 1.33% of the company's total sales in 2015. In comparison, ABS-CBN, GMA's closest peer, paid 177 million pesos or 1.27% of its total sales.

(GMA Network Center, Company website)

Sales and profits

In 2015, GMA reported sales of 13.7 billion pesos and profits of 2.13 billion pesos, a profit margin of 15%. The company also had a five-year (2010-2015) growth average of 2.47% in sales and -3.82% in profits.

Cash, debt and book value

As of June 30, GMA had a total cash of 3.6 billion pesos and total debt of 1.11 billion pesos. Also, the company had a pension liability of 1.15 billion pesos. Nonetheless, the media company had a debt-equity ratio of 0.12 and a book value 9.5 billion pesos.

Cash flow

(GMA 2015 cash flow, annual filing)

In 2015, GMA grew its cash flow from operations by a whopping 422.6% to 3.46 billion pesos. The red boxes in the image above indicate that GMA had more deductions in its cash flow in 2014 compared to the year prior and after that fiscal year. Nonetheless when compared year on year, GMA rebounded from a bad year in 2014; the company had an average cash flow of 2.9 billion pesos from 2011 to 2013.

Further, GMA allocated 552.8 million pesos in its capital expenditures leaving it with 2.9 billion pesos in free cash flow.

The media company also took in 1.2 billion pesos in debt while reducing its debt and interest by 2.4 billion pesos. GMA also handed out 1.2 billion pesos in dividends. This would represent a 42% free cash flow payout ratio. Currently, GMA Network sponsors a 6.3% dividend yield. This would be 56% of its year-to-date free cash flow.

Valuations

As pointed out from the Bloomberg reference earlier, GMA was just trading at a P/E ratio of 0.43 times and P/S ratio of 0.12 times. Relying on those figures just does not satisfy my findings that GMA is grossly undervalued by the market.

Financial Times, meanwhile, had the media company valued at a ttm P/E ratio of 9 times. The figures used were 21 billion pesos for market capitalization and ttm profit of 2.3 billion pesos. Trailing 12-month values are slightly difficult to calculate and require different quarterly and annual inputs.

I assume the Financial Times figure is a slightly more accurate valuation of GMA Network's P/E. Still, there is something missing. The Financial Times data used a basic earnings per share (EPS) to derive its valuation. Nonetheless, my quarterly report digging revealed that GMA Network had some 1.5 billion possibly convertible preferred shares that may as well be prudently added to the total common shares outstanding so as to retrieve a diluted EPS figure.

(Read about Diluted Earnings Per Share.)

From a ttm basic EPS of 69 cents, GMA would then have a diluted EPS of 48 cents per share. Meanwhile, the media company would also be trading at 2.23 times when using figures found in its recent quarterly report. As a support to this P/E multiple finding, the local exchange website, Philippine Stock Exchange, also indicated that GMA's shares were trading at about 14.5 times earnings.

Conclusion

Investors willing to invest in foreign company shares should not assume that valuations, such as the P/E, already discounted all the convertible preferred shares. In this case, GMA had plenty, 1.5 billion preferreds, that can still be included in the total share count when seeking diluted EPS. GMA Network is not grossly undervalued by the market as indicated in the Bloomberg valuation.

In comparison, the broader Philippine market index, known as the iShares MSCI Philippines ETF (EPHE), currently trades at 22 times. Meanwhile, GMA's closest peer ABS-CBN trades at 11.6 times P/E. This would mean that GMA Network is actually trading at a little more premium than its leading competitor. ABS-CBN claimed in its recent quarterly report that had no dilutive potential common shares outstanding.

Also, it would be safe to discount that GMA Network's recent explosive growth in sales and profits was brought by the once every six-year event, the presidential elections. The media company's shares also had been underperforming the broader Philippine market index since 2011.

Nonetheless, GMA Network has outperformed its leading peer, ABS-CBN, in terms of profitability measures and consistent cash flow generation. GMA had 15% profit margin in fiscal year 2015 while ABS-CBN had just 6.6%. The company also sponsors a well-covered dividend while illustrating an attractive yield.

Meanwhile, solving for GMA Network's Benjamin Graham number would indicate that its intrinsic value would be at 4.61 pesos per share. This would mean that the media company's shares are currently overvalued by 27%.

(Read about the Graham Number.)

Disclosure: I do not have shares in any of the companies mentioned in this article.

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