The Outlook revision reflects the agency's expectation that the improvement of GMM’s financial leverage will be slower than we previously expected because the digital TV business is taking longer than expected to reach the breakeven point. Fitch now expects the company's net adjusted debt/EBITDAR – proportionally consolidating the 51%-owned GMM One TV Trading Company Limited (ONE) – is likely to stay above 3.5x in the next two years, the level at which we may consider positive rating action.
KEY RATING DRIVERS
Uncertainty of Digital TV Business: Fitch expects GMM's digital TV business to continue to face challenges over the next two years, due to an intense competition from the number of new operators in the market. This may result in price competition that could delay GMM’s expansion in this market, even though digital TV revenue could increase significantly in 2015 and 2016, driven by more programme launches and greater digital TV penetration.
Leverage to Remain High: High licence fees, additional investment in digital TV business, and relatively weak cash generation, will keep GMM's financial leverage high – at 6.0x-7.0x in 2015. However, credit metrics are likely to improve from 2016 onwards due to higher earnings from the digital TV business. Net adjusted debt/operating EBITDAR could reduce to 3.5x-4.5x during 2016-2017. Nevertheless, a slower-than-expected growth in digital TV could prolong the deleveraging.
Margin Pressure: Low earnings during the expansion of GMM’s digital TV business will put pressure on the overall profit margin in 2015. Nonetheless, growth in digital TV revenue should translate into a strong margin improvement from 2016. With the operating costs of the digital TV business largely fixed, an increase in revenue would be mostly translated into profit.
Leading Media/Entertainment Company: GMM is an integrated media and entertainment company that is dominant in Thailand’s local music industry with more than 70% revenue market share in 2014. It is one of the key producers of various mass media, including television, radio, movie, publishing, and digital content. Fitch expects the music and television businesses to remain the company’s key revenue contributors over the medium term.
KEY ASSUMPTIONS
Fitch’s key assumptions within the rating case for GMM include;
- Strong growth in digital TV business in 2015 and 2016;
- Profit margin to improve in 2015 and 2016;
- Capex of about THB1.0bn per annum in 2015 and 2016 (including only 51% of ONE’s capex);
- Leverage takes into account the proportionate consolidation of ONE (51%) as GMM reduced its stake in ONE to 51% in March 2015 from 100% previously.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The company demonstrates strong cash flow generation from its digital TV business, leading to positive FCF, and net adjusted debt to EBITDAR (51% proportionate consolidation of ONE) of below 3.5x (2014: Negative EBITDAR), both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net adjusted debt to EBITDAR (51% proportionate consolidation of ONE) remains above 4.5x on a sustained basis.