Russian media: “Expect high returns”
Russian publicly-listed broadcasters (and web-providers) do not get that much comment in the ‘West’, but a major 80-page report from investment banker Morgan Stanley for clients says they expect Russian media sector to again “outperform” in 2014.
“Russian media generates high returns and margins. This is due to normal structural drivers such as rising Internet penetration and the early monetisation of search, social and gaming. The leading Russian companies also benefit from tight control of access, content and communication platforms as well as untypically low levels of inventory fragmentation. This enabled structurally high levels of monetisation. Limited fragmentation (even in TV) has enabled all the Media companies to generate amongst the higher margins globally (Mail 53 per cent, Yandex 45 per cent, Qiwi 53 per cent, CTC 32 per cent) with low levels of capex and acquisition outlay.”
One of its recommended stocks is CTC Media, which has just made some significant management changes, including on January 20th a new head at its female-skewing Domashny Channel (Lika Blank, from MTV Russia).
Yuliana Slashcheva, CTC Media’s CEO: “We all really love Domashny Channel and believe in its huge potential for further growth. With Lika Blank’s appointment, the market and viewers will see a new Domashny already this year. Lika’s experience in planning, creating, and promoting in-demand content for a young viewing audience combined with the Domashny team’s experience will make it possible to realize the creative potential of one of CTC Media family’s key brands in a new way. A strong team that knows how to turn bold creative ideas into reality and monetize them has and always will be our main asset.”
Besides Domashny, CTC Media operates CTC Channel, and also Peretz as well as Channel 31 in Kazakhstan and a TV business in Uzbekistan. CTC is partly backed by Modern Times Group.
The bank’s report says: “We raise our target price from $13 to $15 to reflect greater confidence that CTC will successfully navigate the digital transition in Russia. We are encouraged by the incoming CEO’s (Yuliana Slashcheva) new strategic plan and we believe it justifies a higher target multiple (to 16x 2015 PE) as it structurally lowers the risk to mid-term FCF forecasts.”
“Overall the audience trends were firmer in 2013 and we remain encouraged by recent initiatives of new CEO, Yuliana Slashcheva, such as a new focus on Russian premieres. Key to strategy is to produce and own a greater proportion of broadcast content. Recent successes include Molodezhka (Youth Hockey League) series. The average target audience share of the overall series (October 7th to December 12th) was a strong 16.2 per cent, making CTC the most watched broadcaster in Russia in late night prime time. During November 18th – 26th the typical foreign film slot was replaced with new 12 episode premiere
After Life (Vizhit Posle), which delivered 20 per cent higher viewing of 10-45yrs averaging 13.7 per cent with peak of 19 per cent.”
However, there are some risks ahead, not least in the costs for getting on board Russia’s expansion into digital TV. “The expected $25 million annual fee for digital transmission is punitive for CTC’s smaller channels. While reducing distribution in smaller cities, shifting Domashny to the eventual third multiplex would save over $15 million annually, we believe,” stated the bank.
The report continued: “We still believe the digitalisation of television in Russia is at best neutral for CTC and likely ultimately to prove a negative driver. As Russia digitises, the competitive environment for TV will toughen, in our view. This is because the technical penetration of smaller channels will increase, reducing the competitive advantage of CTC’s core channel which increased its technical reach from 87 per cent in 2008 to 96 per cent in 2012.”