Financial Adviser: 5 Reasons Why GMA Network is the Most Underrated Media Stock and How to Profit from It

Legendary investor Warren Buffett once said that “the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

A company that enjoys strong branding, large economies of scale or virtual monopoly is considered to have a wide economic moat, which allows it to enjoy a distinct advantage over its competitors to protect its market share and profitability.

GMA Network, Inc (PSE: GMA7) is one of the few companies in the market with a strong economic moat that enables it to generate above-average industry profits.

After its closest rival, ABS-CBN (PSE: ABS) went off the air in 2020, GMA7 strengthened its leadership in viewership as the most watched TV network in the country with 52.5 percent audience share.

GMA7 continues to widen its moat this year by developing more content and acquiring top-rated talents to stay ahead of its competitors.

Last year, GMA7 was one of best performing stocks in the Philippine Stock Exchange when its share price increased by 130 percent in one year.

But this year, the share price of GMA7 has been on a downtrend, underperforming in the overall market with a year-to-date loss of 20.2 percent, as investors’ sentiment turned negative due to the prevailing uncertainty in the global economy.

Does the share price of GMA7 currently offer a good value investing opportunity? Will the company continue to dominate and enjoy superior earnings? What is the fair value of the stock given the company’s competitive advantage?

Here are the five things every investor needs to know about GMA7 and why the stock may be one of the safest stocks to own during this market downtrend:

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1| Accelerating earnings growth

GMA Network (PSE: GMA7) is the leading broadcasting company in the Philippines, operating a network of 47 VHF and 41 UHF TV stations, as well as 24 radio stations throughout the country.

About 94 percent of its revenues comes from television and radio advertising, while the remaining six percent comes from consumer sales.

GMA7’s earnings have been growing by an average of 7.3 percent per year from P1.6 billion in 2012 to P2.6 billion in 2019 on the back of annual revenue growth of 4.5 percent.

During the 2020 pandemic, after its closest rival ABS-CBN (PSE: ABS) was shut down by the government, GMA7’s net earnings accelerated by 129 percent to P6.0 billion as its total revenues increased by 17.2 percent to P19.3 billion.

In 2021, with GMA7 dominating TV viewership, total net earnings increased further by 25 percent to P7.5 billion while its total revenues grew by 16 percent to P22.4 billion.

This year, GMA7’s net earnings for the first six months continue to increase, albeit at a slower growth of nine percent, to P4.0 billion from P3.7 billion in the same period last year, as total revenue steadily grew by 12 percent to P11.9 billion.

If we annualize GMA7’s first half earnings based on its 2021 historical ratio of 48 percent, we can estimate that the company will likely end this year with a net income of P8.3 billion.

Though this projected net income of P8.3 billion will represent a slower growth of 10 percent from last year, this level of earnings represents more than three times the average annual earnings of GMA7 from pre-pandemic levels at P2.5 billion.

2| Strong balance sheet and effective management

GMA7 is practically debt free given its negative net debt position of P2.5 billion.

Based on its latest balance sheet, GMA7 boasts a cash reserve of P3.5 billion, which represents more than three times its short-term debt of P1.0 billion.

Moreover, GMA7 enjoys high liquidity ratio as it maintains P2.47 worth of current assets for every P1.00 of current liabilities.

The company’s cash and receivables worth P9.3 billion comprise about 65 percent of its current assets, which is more than enough to pay off all its current liabilities amounting to P5.8 billion.

GMA7 also has a track record of good financial management. Prior to the pandemic, the company has been averaging double-digit return on equity of 26 percent.

During the 2020 pandemic, GMA7 doubled its return on equity to 53.4 percent, which increased further to 55.21 percent last year.

This year, assuming GMA7 achieves a net income of P8.3 billion against an average of equity of P13.0 billion, return on equity is projected to increase to 63 percent.

3| Rising cash dividend yields

GMA7 has been a consistent dividend payer for the past years. The company pays out 96 percent of its net income on the average as its dividends.

But last year, GMA7 paid out a record cash dividend of P6.5 billion, representing 110 percent of its 2020 net income or P1.35 per share, which was over four times the cash dividend it paid in 2020 at P0.30 per share.

This year, GMA7 increased its cash dividends further by seven percent to P1.45 per share or a total of P7.0 billion, representing about 93.7 percent of its 2021 net income.

If GMA7 will keep the same cash dividend of P1.45 per share next year, the current price of the stock at P11.04 per share offers a prospective dividend yield of 13.1 percent.

However, because net income of GMA7 is expected to increase this year, we should also expect its cash dividend next year to increase, too.

If GMA7 will continue to maintain the same dividend payout of 93.7 percent in 2023, and we expect the company to achieve a projected net income of P8.3 billion in 2022, we can forecast the company to raise its total cash dividends next year by 10 percent to P7.8 billion or P1.60 per share.

At P1.60 per share projected cash dividends, the prospective dividend yield will be 14 percent at current share price.

If we equate this cash dividend at GMA7’s average dividend yields last year at 9.75 percent, share price of the stock should appreciate to P16.4 per share.

4| Priced at low earnings multiple

If we compute GMA7’s last 12 months’ net income from June 2021 to June 2022, we will get a trailing income of P7.9 billion.

Using this trailing income against GMA7’s market capitalization of P37 billion, we can estimate the stock’s Price-to-Earnings (PE) ratio to be at 4.7 times only, which is attractively low compared to its pre-pandemic PE average of 11 times.

At 11 times earnings, GMA7’s stock should be priced prospectively at P25.8 per share.

Now, we can also use GMA7’s average PE last year at 8.94 times as immediate reference. At this ratio, the stock should be priced at P20.86 per share.

The other way to price GMA7’s earnings is by computing its Enterprise Value (EV) and relate it to its EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization).

The Enterprise Value (EV) of a company is computed by simply taking the sum of the market value of its equity and net book value of its debt.

The EBITDA, on the other hand, represents the “cash earnings” of the company.

Using the current market capitalization of GMA7 along with its debt and cash reserve, we can estimate that its EV stands at P34.6 billion. If we divide this amount by its 12-month trailing EBITDA of P11.1 billion, we will get an EV/EBITDA ratio of 3.11 times.

If we price GMA7 at its average EV/EBITDA of 4.07 times from last year, share price of the stock should be valued at P14.24 per share.

5| Trading at steep discount to its intrinsic value

It has been said that a company creates value for its shareholders when it generates a return on invested capital (ROIC) that is higher than its weighted average cost of capital (WACC).

The higher the residual spread between a company’s ROIC over its WACC, the higher the share price of the stock should be as reflected in its high Enterprise Value (EV) to Invested Capital (IC) ratio.

In theory, the ratio of ROIC-to-WACC should be equal to EV-to-IC ratio so that when a stock’s ROIC-to-WACC is higher than its EV-to-IC ratio, it means that the stock is undervalued, and vice versa.

If we apply this theoretical valuation to GMA7, we will find that the stock has a huge ROIC of 80.8 percent against its WACC of only 8.3 percent, which is fantastic.

GMA7’s 12-month trailing operating income of P10.4 billion against an invested capital of P12.9 billion, which is net of its current liabilities and cash generates a large return or ROIC of 80.8 percent.

An ROIC higher than the cost of capital means that GMA7 is managing well its capital that creates value to its shareholders.

If we take the ratio of GMA7’s ROIC-to-WACC, we will derive a multiple of 9.72 times.

At GMA7’s current share price of P11.04 per share, GMA7’s projected Enterprise Value is estimated at P34.6 billion.

If we compare this against the GMA7’s invested capital of P12.9 billion, we will derive an EV-to-IC ratio at only 2.68 times.

Because GMA7’s ROIC-to-WACC ratio at 9.72 is higher than its EV-to-IC ratio of 2.68, the stock is deemed to be largely undervalued. The value created by GMA7 for its shareholders should eventually reflect in its share price.

If we equate GMA7’s EV-to-IC ratio to its ROIC-to-WACC ratio at 9.72 times, we should theoretically derive target market capitalization for GMA7 at P128 billion or P38.08 per share.