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Monday, February 24, 2020

Investment Thesis: ABS-CBN Corporation (PSE: ABS)


Current Market Price: P 23/Share as of Feb-24-2020

Annual Sales: P 40.1 B

Net Income: P 2.1 B

Book Value: P 35.7 B

Current Market Cap: P 19.8 B

Market Position: Dominant, number 1 player in Philippine mass media

Risks: Franchise renewal risk, Rise of social media, mobile phone platforms away from traditional TV

ABS 20-Year Chart, Monthly


1. Very cheap valuations

Price to Earnings Ratio (P/E) = 6.64
Price to Book Ratio (P/B) = 0.54
Price to Sales Ratio (P/S) = 0.44
Dividend Yield = 2.39%

We think that owning the country's top mass media company is a steal at valuations above.
One of the reasons why valuations are depressed is the risk of non-renewal of ABS-CBN's franchise.  Though we think this is a serious risk for this investment, we think that ABS-CBN's franchise will be renewed and our reasoning will be discussed later in this article.

ABS-CBN's financial highlights as follows:
  • Revenues grew from 33.5B to 40B in the last 5 years
  • Net income was relatively stable not falling below 2B in the last 5 years, yes it decreased from 2.3B in 2014, but hey! We are buying a bargain with 50% discount to its book value, we cant be too choosy! haha! xD
  • Strong cashflows from operations averaging about 6B in the last 5 years fully covering capital expenditures in the last 5 years except in 2014.
2. Stable business with strong cashflows

FINANCIAL METRIC31-Dec-1831-Dec-1731-Dec-1631-Dec-1531-Dec-14
Net Income2,110.253,333.893,885.282,931.782,387.09
Cash & ST Investments19,908.7313,704.9914,030.3213,155.1113,238.38
Total Assets84,559.2275,105.0972,733.9570,424.1067,236.82
Total Liabilities48,961.1241,825.9541,678.9342,612.6041,849.49
Total Equity35,598.1033,279.1331,055.0227,811.5025,387.33
Cash from Operating Act6,726.126,629.058,551.007,568.364,832.59
Capital Expenditures-5,970.70-5,058.39-5,565.61-4,743.81-4,991.98
Free Cashflow755.421,570.662,985.392,824.55-159.39

3. We think that franchise will be renewed 
The crux of the matter is we think that the franchise of ABS-CBN will be renewed given the following:
  • The government will not risk losing 11,000 jobs due to the company's closure
  • Given current news flow it appears there is really no reason to not renew the franchise
  • Yes, ABS may have some short comings but who does not? The good thing here is the government through its scrutiny and threats reminds the company (and everyone for that matter) that hey, at the end of the day, you still answer to the government and therefore you should behave properly
  • We like to think of it as the government being the parent of a child (ABS). The child misbehaved in the past, hence the parent is just trying to discipline the child (ABS) for the interest of the whole family (the country) and the child (the child will be a better/disciplined adult in the future). If the parent just lets his child be despite misbehavior and do not show that child that there are consequences to his actions then the child would grow up spoiled
  • So if anything, the ongoing hearing about ABS's franchise renewal is a testament that the Philippine system is working, because no party (either from the government or the corporation) is getting his way, stakeholders are coming together for a discussion to move forward
  • Lastly, and this is just our opinion based on evaluation of the situation, if the President Duterte does shut down ABS-CBN (though the executive department has repeatedly said that the decision lies with congress/senate and not the executive branch, but for the sake of this thought exercise lets accept it as a hypothetical) -  then, he just proved to everyone including his critics that he is indeed a tyrant (as what his critics has been accusing him of) - of which we do not think will be the case because why would you prove your critics right? 
  • So given the points above, in our view, ABS-CBN's franchise will eventually be renewed
4. 2020 Presidential Elections will serve as a strong tailwind for the stock

Based on the 20Y price chart analysis of ABS stock, we have noticed a seasonal / event driven rally going into Presidential elections. The economics behind this tendency is because during Presidential elections, revenues of ABS tend to have an uptick due to increased booking from Political ads. We've observed this in the past, and we think that this will likely happen again in this up-coming 2022 Presidential election - which is just 2 years away


Potion: Long

Average Entry Price: P 21.8986


  • 22.99% of discretionary Philippine equity portfolio
  • 3.57% of quantitative Philippine equity portfolio

This is not an investment advice and The Filipino Investor shall not be responsible or liable for any trading or investment decisions made based on this information. The Filipino Investor hereby expressly disclaims any responsibility for any error or inaccuracy in the information.

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