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July 25 (The following statement was released by the rating agency)
Fitch Ratings (Thailand) Limited has revised
Thailand-based GMM Grammy Public Company Limited's (GMM) Outlook to Positive
from Stable and affirmed its National Long-Term Rating at 'BBB+(tha)'. At the
same time, the agency has affirmed its National Short-Term Rating at 'F2(tha)'.
The rating action follows GMM's announcement that its pay TV business and CTH
Public Company Limited (CTH), one of Thailand's major pay TV operators, would
The Positive Outlook reflects GMM's lower exposure to execution risk of the pay
TV business following the transaction and an improved financial profile, once
the pay TV business is deconsolidated.
KEY RATING DRIVERS
Deconsolidating Pay TV Business: GMM's share swap deal with CTH to offload its
loss-making pay TV business is positive to its credit profile. GMM's pay TV
business will be integrated with CTH's pay TV operation, in which GMM will own
10%. The transaction will result in the deconsolidation of pay TV operations
from GMM's financial statements.
Better Projected Credit Profile: The transaction will reduce GMM's exposure to
execution risks in the pay-TV business, and allow the company to focus financial
and management resources on its new digital TV business. Fitch expects GMM's
earnings and cash flow to improve in 2015 due to a reduction in pay TV-related
costs, including cash operating cost (THB700m-800m) and capex for content
acquisition (THB600m-1bn). This will be more than enough to offset the
subscription revenue foregone (THB1bn-1.2bn).
Remaining Challenges for Digital TV: The transaction will improve GMM's leverage
outlook in the medium term - FFO-adjusted net leverage is likely to fall below
3.5x in 2015 and 2016 from over 5.0x expected at end-2014. However, before
upgrading GMM's rating to 'A-(tha)', Fitch would expect GMM to be able to
demonstrate a strong cash flow generation from its digital TV business and a
sustained positive free cash flow. Nevertheless, the Positive Outlook indicates
that these conditions may be met within two years.
Expanding Broadcasting: Digital TV is likely to be a key growth driver for GMM
in the medium term. The company launched digital TV channels in May 2014, after
it won the bidding for two licences in December 2013. The company aims to move
most of its content from satellite TV channels to the new digital TV platform,
while gradually adding new programmes to the new digital TV platform to be in
line with the expected advertising revenue growth. The likely higher advertising
rates for digital free TV due to wider viewer coverage than that of satellite TV
should boost the group's revenue in the medium term. However, the size and
presence of a number of new operators in the digital TV market may lead to
higher price competition than expected.
Margin Pressure: Low earnings from the digital TV business will put pressure on
GMM's profit margin in 2014. Nonetheless, the profit margin is likely to improve
in 2015 and 2016 as revenues from digital TV increases. With the operating costs
of this business largely fixed, a large proportion of any increase in revenue
translates into profit.
Large Investment: Fitch expects the high digital TV licence fee to result in
negative free cash flow and limited financial flexibility for GMM for at least
two years. However, the likely increase in earnings after 2015 is likely to
improve GMM's financial leverage.
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 free cash flow while FFO-adjusted net leverage is
below 3.5x, both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- Earnings and cash flow deterioration leading to FFO-adjusted net leverage of
over 4.5x on a sustained basis.