University of Santo Tomas

ABS-CBN Investment Research

CORPORATION Service Sector, Media
Philippine Stock Exchange (PSE)
Date: November 15, 2018 Closing Price: PHP 19.50 Recommendation: BUY (62.17% Upside)
Ticker: ABS Target Price: PHP 31.62

Investment Summary
A BUY recommendation is issued on ABS-CBN Corporation (“ABS”, “the
Market Profile
Company”) with a one-year target price of PHP31.62 using the Discounted
Closing Price Free Cash Flow to Firm method. This offers a 62.17% upside from its
19.50
(PHP)
closing price of PHP19.50 on November 15, 2018. ABS was able to post an
Outstanding
Shares
862,192,581 upward trend with its revenues which will significantly grow especially
Free Float Level 42.61%
upon the 2019 senatorial and 2022 presidential elections.
Market
Capitalization 17,071.41 Pioneer and Market Leader in the Media Industry
(PHP Millions) ABS-CBN is the country’s largest media conglomerate in terms of assets,
Dividend Yield 4.63% revenues and equity. Aside from the media industry the Company has
Adj. 52 Week ventured out into new businesses showing the determination towards
35.75
High expansion, ABS built new sound stages in Bulacan. The Company is
Adj. 52 Week
19,00
involved in broadband services, theme parks, and home shopping that brings
Low additional income to the Company (Figure 1).
P/E 6.48
P/B 0.51 Lucrative Outlook in Business Operations
Sources: PSE, Bloomberg, and Advertisement spending of businesses in the Philippines is expected to
Thomson Reuters increase by up until 3.50% based on a study by eMarketer. Advertising sales
Share Price Movement is subject to seasonality ⸺ an upsurge on advertising sales are anticipated
80 10,000due to senatorial and presidential elections in 2019 and 2022 respectively.
PHP per share

60 8,000 ABS-CBN TVPlus (Figure 3), since its launch date in 2015, 7 million units
6,000 have been sold nationwide, which amounts to PHP 2.7 billion, 6% of the
40
4,000 total revenue.
20 2,000
0 0 Promising Financial Performance
30-Nov-2013
30-Nov-2014
30-Nov-2015
30-Nov-2016
30-Nov-2017
30-Nov-2018

The Company has proven its capability in generating income through their
business operations. The EPS of the company historically has been stable
and for the forecasted it is expected to grow by up until 36 %thus giving
much value to their shareholders. CAPEX is also expected to increase with
ABS PSEi
a CAGR of 6% for the next 5 years which is intended for the Company’s
Sources: Bloomberg and Thomson property and equipment needed for business operations and expansions.
Reuters
ABS-CBN's Key Financial Highlights
2015 2016 2017 2018E 2019F 2020F 2021F 2022F
Total Assets (in millions PHP) 70,424 72,734 75,125 79,193 83,181 85,312 81,981 87,735
Revenues (in millions PHP) 38,278 40,698 29,489 41,994 46,362 46,798 47,943 54,300
Net Income (in millions PHP) 2,545 3,525 3,164 2,615 3,347 3,124 3,379 4,606
Debt-to-Equity Ratio 1.45 1.30 1.23 1.20 1.16 1.08 0.88 0.85
Gross Profit Margin 40.15% 42.28% 39.42% 38.06% 38.15% 38.01% 37.90% 38.04%
Net Income Margin 6.65% 8.47% 7.77% 6.23% 7.22% 6.68% 7.05% 8.48%
Fixed Asset Turnover 0.95 0.97 0.92 0.90 0.93 0.90 0.89 0.97
Earnings Per Share (PHP) 2.92 4.04 3.63 3.03 3.88 3.62 3.92 5.34
Return on Equity 8.86% 11.12% 9.38% 7.28% 8.68% 7.61% 7.73% 9.73%
Source: Team Estimates
Figure 1. Revenue Breakdown as of Business Description
December 31, 2017
3% 2% ABS-CBN Corporation is the biggest media conglomerate in the country
that primarily engages in television and radio services. ABS produces a
range of entertainment programs in multiple genres and news programs that
airs on free-to-air television. The Company owns a cinema and music
22%
production and distribution outfits within the country and brings its content
to worldwide audiences via cable, satellite, online, and mobile. ABS-CBN
also venture out its business to merchandising, money remittance, cargo
73% forwarding, food and restaurant services, theme park development and
management, and property management.

The operations of the company are divided into four segments, mainly:
Media Network & Studio
Entertainment Media Networks & Studio Entertainment that is composed of broadcast
Cable Satellite & Broadband covering content creation, news programs, global operations and radio
services. Cable, Satellite & Broadband which includes TV cable services
Digital & Interactive Media
and internet connection from the Company’s subsidiary Sky Cable. Digital
Consumer Product & Experience & Interactive Media that pertains to digital platforms showing media content
from ABS CBN. Lastly, Consumer Products & Experience that includes
Source: Company Data
other businesses of the company such as theme parks, home shopping and
Figure 2. Shareholder Structure merchandising. On an average, 73% of the Company’s sales are derived
from Media Networks & Studio Entertainment. The Company’s subsidiary
also offers Cable, Satellite & Broadband from Sky Cable, postpaid and
prepaid packages, and broadband and mobile data services (Figure 1).
42%
Shareholders Structure
58% As of June 2018, there are currently has 883 million listed common shares
that are composed of non-public and public stocks. 515 million shares are
non-public and the remaining 367 million are owned by the public, making
a 42% free float. The principal shareholder of ABS-CBN is Lopez Inc.
having 55% of the outstanding shares. Following Lopez Inc. is ABS-CBN
Non-public Public Holdings which has 37% of the outstanding shares; the rest are owned by
Source: Company Data private shareholders (Figure 2).
Table 1. Top 5 Private Shareholders
Corporate Governance
No. of
Name
Shares
% ABS-CBN upholds the values excellence, teamwork, teaching and learning,
meritocracy, honesty, integrity and respect, and service orientation. The
LOPEZ, INC. 480,933,747 54.43% company is committed in giving the Filipino people the best service by
practicing good business ethics and values.
PCD NOMINEE
373,228,814 42.24%
CORPORATION The Company is recognized by different institutions such as the Securities
and Exchange Commission (SEC), the Institute of Corporate Directors
CHING TIONG
KENG
859,500 0.10% (ICD), the Institute of Internal Auditors of the Philippines (IIA-P), and the
Chartered Financial Analysts (CFA) as one of the Top 50 Philippines
ABS-CBN Publicly-Listed Companies in 2013. The Association of Southeast Asian
FOUNDATION, 780,995 0.09%
INC. Nations (ASEAN) Corporate Governance Scorecard (ACGS) standards
were the basis for such recognition. In 2015, FinanceAsia listed ABS-CBN
EUGENIO
LOPEZ III
769,690 0.09% as one of the top three best mid-cap companies in the Philippines; identified
in a poll of 250 portfolio managers and buy-side analysts.
Source: Company Data
 Table 2. Board Meeting Corporate Social Responsibility
Attendance
Position of
Member 2017 Attendance ABS-CBN engages in several activities and community services to promote
Chairman Eugenio Lopez
its advocacies namely rehabilitation, child welfare, and environmental
70% protection. ABS-CBN Lingkod Kapamilya Foundation, Inc. was organized
Emeritus III
Martin L. to address the different social issues. The corporation focuses in three
Chairman 86% programs namely Operation Sagip, Bantay Bata, and Bantay Kalikasan.
Lopez
Vice Augusto
100%
Chairman Almeda-Lopez COMPANY STRATEGIES
Carlo L.
President 100%
Katighak
Board Building on Core Strength in Content Creation
Oscar M. Lopez 70% The Company will continue to innovate and enhance the services they are
Member
Board Federico R. offering. The more innovation you have, the more competitive advantage
70%
Member Lopez you gain. With the new sound stages in Bulacan, the Company plans
Board Manuel M. produce Hollywood-level films and TV programs that will help ABS
60%
Member Lopez compete globally. The inauguration of new sound stages seems to be cost-
Board Federico M.
60% efficient - by having own studio, the company will be able to cut down
Member Garcia
Board Salvador G. expenses for a long run rather than renting or leasing. Aside from the sound
100% stages, the production hub will also include back lots, production and
Member Tirona
Independent Antonio Jose U.
80%
post-production facilities and offices.
Director Periquet
Independent Emmanuel S.
Anytime, Anywhere, in any Device or Medium
90%
Director De Dios
The Company assures that the product and services are convenient to the
Source: Company Data
consumers. Having easy access with the products will gain more demand
Figure 3. ABS CBN TVPlus Units for the products and will increase the profitability of the Company. ABS is
Sold from 2015-2018 (in thousands) continuously expanding its reach by producing platforms that enables
3000 consumers to access media content from mobile applications, websites, and
others. Furthermore, there are physical stores located in malls, stores that
2500 offer ABS-CBN TVPlus. Lastly, ABS-CBN is increasing its signal
2000 coverage, not only domestically but also internationally. The Filipino
1500
Channel is an example of the Company’s international coverage.

1000
Maintain a Strong Financial Position and Bring Value to Our
500 Stakeholders
0
ABS CBN derives the most synergies possible between their content and
distribution businesses. The Company guarantees to operate more
2015 2016 2017 2018
efficiently and cost-effectively, as they deliver greater value to their
Source: Company Data
audience, customers, clients, partners and shareholders.
Figure 4. GDP Growth Rate of
the Philippines
9% Economic Overview and Competitive Advantage
8%
7%
6% Philippine Economic Performance
5% Positive Outlook on Philippines’ GDP Growth
4% Philippine Economy posted a 6.1% GDP growth in the 4th quarter of 2018,
3% it was mainly driven by the industry sector with a growth of 6.9%in the last
2% quarter. (Figure 4) Historically, advertising spending growth had a direct
1% correlation with economic growth. The market share of the subsidiaries in
0%
2013…
2013…
2014…
2015…
2016…
2016…
2017…
2018…

their respective industries will be flat on the assumption that the industries
also grow at par with the economy.
Source: Philippine Statistics Authority
 Figure 5. Inflation Rate & Year-end Inflation Slows Down yet Interest Rate is Unchanged
Interest Rate The Philippines experienced an annual inflation rate of 5.2% in 2018. The
8% high inflation rate is attributed to both domestic and international stress.
7% Domestically, the prices of food and non-alcoholic rose, is the main cause
6% of the increase in inflation rate from 2.9% in 2017 to 5.2% in 2018. With
5% inflation being in an unsustainable rate the Bangko Sentral ng Pilipinas
4% (BSP) raised the interest rate in five hikes, leading to a 4.75 % interest rate.
3% The BSP announced that even though the inflation of the country is getting
2% lower, they plan to keep the current interest rate. With lower demand
1% brought by inflation and with higher borrowing cost the Company could
0% report a lower revenue and net income. (Figure 5)
April

August
January

March

June
May

October
July

September

November
February

Peso Strengthened Against USD

The Philippine Peso strengthens as it went to PHP 52.35 for one US dollar
Inflation Rate Interest Rate
in January 31, 2019. PHP started the year 2018 with an exchange rate of
Source: Philippine Statistics Authority
PHP 49.95 it has closed to PHP 52.72 that shows a depreciation in year 2018
due to the increase of imports, but as of January 2019 it appreciated to PHP
Figure 6.Total Media 52.35. The industry can gain with its remittances but could also lose, caused
Advertising Growth in the by higher expenses for international operations.
Philippines
6% Rapid Progress in Technology with Mass Digitalization
5%
Better video, picture, and print quality, and stable connection in distribution
channels are some of the benefits that the industry gains from the advanced
4%
technologies. There are also disadvantages with the speedy innovation; it
3% becomes easier to pirate digital products with the new machineries,
2% threatening the industry’s ability to earn from its products. (Appendix B-1)
1%
0% Competitive Positioning
Demanding Capital Requirement
High capitalization is required in businesses such as media therefore making
Source: eMarketer it hard to form such business immediately. Patents, licenses, trademarks and
copyrights are acquired by the firms to ensure that the products would be
Figure 7. Porter’s Five Forces
difficult to plagiarize. Exit cost is relatively high since media firms has
Bargaining stakeholders that will be affected upon the discontinuation of operations
Power of (Figure 7).
Buyers
4
3 Zero Switching Cost
2 BargainingThe industry has a high rate of bargaining power of buyers because
Industry
1 Power of
Rivalry
Suppliers
switching to another TV station for that matter is at no cost. Also, media
0 companies offer the same product that is why buyers has the control over
the medium that the product or service by the media networks can be
Threat of Threat of New acquired on by the consumers. Examples are streaming sites like YouTube,
Substitutes Entrants Netflix, Hulu, and Amazon Video. (Figure 7)
1 Insignificant threat to the industry
Dependency on Talents
2 Low threat to the industry The suppliers of the media industry are the talents and celebrities, directors,
3 Moderate threat to the industry producers, newscasters and advertisers. These groups of people comprise of
4 Significant Threat to the Industry the products and services that the media networks offer to its consumers in
the industry. The development of new products and services of the media
Source: Team Analysis
 Figure 8. Audience Share in industry largely depends on the quality of service that the suppliers give to
Percentage the media networks and to the media industry. (Figure 7)
50
Competition for TV Ratings
40 Rivalry among competing firms is intense in the media industry. There are
only few competing media networks who offer the same products and
30
services that are at top in the industry. Television ratings are what the
20 players in the industry compete for; it is because ratings determine who
commercial upwards. (Figure 7)
10
0 Key Players in the Industry
The main players of the industry are ABS-CBN and GMA which both
claimed that they had the highest nationwide audience share in May 2018.
According to Kantar Media’s latest disclosure, for 2018 ABS CBN yielded
an audience share of 45% against GMA’s 32%. ABS-CBN also claimed
dominance in all areas such as Metro Manila. (Figure 8)
ABS GMA TV5
Source: Kantar Media
In terms of market share, which is based on 2017 revenues of key players,
Figure 9. Market Share ABS CBN dominates the market having 69% of the market share followed
by GMA with 26% (Figure 9). Also, the Company has relatively larger total
4% 2% assets compared to GMA (Figure 10).

SWOT Analysis
The Company is known to be the biggest entertainment and media
26% conglomerate. ABS-CBN dominates the market by producing a wide range
of entertainment programs and different segments. Despite the strengths, the
Company is exposed to sales volatility due to seasonality. Scandals affecting
68%
the reputation of the Company may affect the market perception and
ultimately leading to decrease in stock prices. Having high audience share,
ABS-CBN will be able to content licensing American TV series’ and
ABS CBN Korean drama series’ which is in demand. (Appendix B-6) However, this
can also be considered as a threat as more and more are watching it.
GMA
Manila Bulletin
Manila Broadcasting Valuation
Source: Team Estimates
Figure 10. Total Assets of ABS and Due to the high financial leverage of the Company, FCFF model is used for
GMA in 2017 (in billions of PHP) valuation. WACC is used as the discount factor upon solving the FCFF.
X`
Upon utilizing the DCF the researchers arrived with an intrinsic value of
80 75 PHP 31.62 which resulted an upside of 62.17% compared to the stock price
70 of ABS CBN as of November 15 which is PHP 19.50 (Table 4). A constant
60 growth rate of 3.09% was assumed for the forecast years 2018-2022
50
40 Revenues Constantly Growing In-Line with Industry
30 The Company is expected to grow constantly under normal years. The
20 15 service industry has grown historically for the past 20 years by at an average
10
of 3.09% (Appendix C-9). Aside from past accounts revenues are still
expected to escalate due to ABS CBN’s board of directors in 2018 has
0
recently approved of merger between Creative Programs Inc. which is
ABS-CBN
Source: Company Data GMA predicted to be a factor to further increase the revenues of the Company.
 Table 4. Valuation Capital Expenditure Expected to Rise Supporting Sales Growth
Total Value of Capital expenditures (CAPEX) in the forecast period will be driven
Core 32,319,192.62 by the expected growth on sales based on the industry movement.
Operations The forecasted Capital Expenditure is used as a function of the
Add: Cash and expected increase in sales of airtime, goods and services per year. The
Cash 15,333,004.65 forecasted CAPEX is 12% higher compared to 2017’s expenditures
Equivalents
Total Firm
and is expected to grow yearly by up at least 10%.
47,652,197.27
Value
Less: Financial High Potential Boost in Advertising Revenue Due to Upcoming 2019
20,386,705.00 Senatorial and 2022 Presidential Election Year
Debt
Total Equity ABS CBN is a company that is greatly affected by election years either
27,265,492.27 senatorial or presidential (Figure 14). Historically, it is evident in the year
Value
Number of 2016 that advertising revenues experienced an upsurge due to political
Shares 862,192,581 campaigns, political debates, and political advertisements. Prices for
Outstanding advertisements rise since election years create demand, while total airtime
Equity Value is unchanged.
31.62
per Share
Market Price Weighted Average Cost of Capital (WACC)
19.5
per Share The cost of equity was calculated using Capital Asset Pricing Model
Upside 62.17% (CAPM). The risk-free rate is 7.7%, obtained from BSP, which is the yield
Source: Team Estimates on 10-year PH government Treasury bond as of November 15, 2018. Beta
was computed using the covariance of the historical monthly return of ABS
Table 5. WACC
CBN’s closing prices and the PSEi’s historical monthly return starting from
Discount November 2013 until November 2018 divided by the variance of the
Value Basis/Source
Rate Input
Cost of
monthly return of ABS CBN’s closing prices. The market risk premium is
Company's debt calculated by the historical yearly average return of PSEi subtracted to the
Debt, Pre- 4.42%
interest rate
Tax risk-free rate which amounted to 12.02%. Meanwhile, cost of debt pre-tax
Philippine
Tax Rate 30.00% was computed by dividing interest expense over that total debt of the
statutory tax rate
Cost of company which, after was subjected to a tax rate of 30%. Based on the
debt, Post- 3.09% Computed capital structure of the Company there is a 54.6% of debt and 45.4% of
Tax equity. A WACC of 8.2% was computed and used as the discount factor of
Yield on 10-year
Risk Free PDST-R2 fixing the FCF model. (Table 5)
7.67%
Rate rate as of valuation
date Terminal Growth Rate
Computed using
Equity Risk historical
The terminal growth rate of the Company is based on the growth rate of
10.84% service sector. Growth in service industry is assumed to be 3.09%, the
Premium premium
approach normal historical growth for the last 20 years.
Computed using
Covariance divided
Beta 0.63 Relative Valuation
by Market
Variance To support the main valuation, which is the DCF Model, the analyst also
Computed using
Cost of performed a relative valuation backing up the buy recommendation. We
14.45% the CAPM
Equity identified the most suitable local peer for ABS CBN would be GMA due to
approach
Capital Structure the similarity in business and operations and the values of market
Computed, based capitalization between the two companies does not fall far from each other
Percentage
54.63% on market values which is 17.1B for ABS CBN and 17.8B for GMA. For ABS CBN’s
of Debt
of debt and equity
Computed, based regional peers the analysts have chosen Intermedia Capital TBK PT, Global
Percentage
of Equity
45.37% on market values Mediacom TBK PT, TV Today Network LTD for the same reason, having
of debt and equity a market capitalization of 20.89B, 15.6B, and 14.4 B respectively.
WACC 8.25% Computed
Source: Team Estimates
 Figure 14. Advertising Revenues Looking at ABS CBN’s price multiples, the amounts are lower compared to
(in billions PhP) the peer median (Table 6). Having low price multiples means that the
35 Company is currently undervalued in the market, thus having an upside
potential. ABS-CBN posted an EV/EBITDA ratio of 2.44x which is
30 significantly lower compared to the peer median which is 4.074x. The
25 EV/EBITDA shows the entire value of the company which is capital neutral
20
and thus having a lower EV/EBITDA supports the analysts’
recommendation of a buy due to the company being undervalued in the
15 market. Being undervalued shows that there is room for the stock price of
10 ABS to increase due to the market correcting itself.
5 Table 6. Relative Valuation
-
2013
2014
2015
2016
2017
2018E
2019F
2020F
2021F
2022F

P/E P/B P/S EV/EBITDA

ABS CBN 6.35 0.86 0.7 2.44
Presidential Elections Peer Median 10.95 2.16 2.15 5.50
Senatorial Elections
Normal Year GMA 11.66 2.09 1.85 3.82
Source: Company Data & Team Estimates
Intermedia Capital TBK PT 12.26 2.55 3.39 10.27
TV Today Network LTD 15.79 4.42 4.05 7.92
Figure 15. Property, Plant, and
Equipment (in billions Php) Global Mediacom 8.68 0.88 0.75 3.06
X` Source: Thomson Reuters & Team Estimates
40
35 Financial Analysis
30
25 Proliferation of Fixed Assets for Long Term Productivity
20 ABS-CBN’s PPE is expected to increase until 2022 (Figure 15). Supporting
15 the forecasted increase on sales for the next 5 years, the growth in PPE is
10 also observable due to the Company’s reliance on long term profitability.
5 Having a fixed asset turnover ratio 0.92 in 2017 in would increase by up
-
until 0.96 giving a 5% growth therefore indicating that fixed assets are being
utilized efficiently by the Company and sales are generated through these
2013
2014
2015
2016
2017
2018

2019F
2020F
2021F
2022F
2018E

assets. Historically, Tower and Auxiliary Equipment are the biggest

contributor to the company’s tangible assets. Investing in these properties
Source: Company Data & Team Estimates
will boost ABS-CBN’S revenues for the next years.
Figure 16. ABS-CBN's EPS

X`
Upsurge on Revenues Giving Much Value to Shareholders
6 Sales for Advertising during elections period are projected to spike therefore
improving the profitability of the Company for the said periods. From the
5
historical data of previous elections advertising sales could increase 22%
4 higher compared to past years. The expected rise on revenues would result
to a higher net income margin of by up at least 8%. The high net income
3 margin would have a good effect in the company’s EPS. Since EPS is an
2 indicator of a company’s ability to declare dividends, ABS will be able to
distribute additional cash inflows for the investors. In the forecasted EPS, it
1 is seen that there is a continuous development from PHP 3.63 in 2017 to
PHP 5.34 in 2022 which lead to 47% growth. (Figure 16)
0

Source: Company Data & Team Estimates

X`
 Figure 17. DuPont Analysis DuPont Analysis
A 7.28% Return on Equity was estimated for the year 2018, which is 22%
lower than the ROE in 2017 which means the company has a decreasing
value for the shareholders, though it is expected due to the seasonality of
LEGEND:
ABS’ revenue, leading to a smaller net income. The return on equity can be
2017 | 2018E further dissected into different components such as asset efficiency,
operating efficiency and financial leverage. As for operating efficiency, it
also decreased from 7.77% in 2017 to 6.23%in 2018, it is attributed to higher
cost of goods sold incurred by the Company. The profitability of the
Company therefore slowed due to the rise of inflation and the Company’s
inability to act upon on the surge of prices. On the other hand, financial
leverage has shown a minimal movement meaning that there is barely any
change from the company’s debt-capital structure. Upon the assessment of
the values, the ROE declined from years 2017 to 2018. (Figure 17)

Source: Team Estimates

Share Price Movement and News Flow

80 Launching of ABS-CBN TVPlus

Presidential Election
60
ABS-CBN Mobile Shut-down
PHP per share

40
KidZania Opening

20

Investment Risks
Economic Risk: Soaring Inflation Rate (ER1)
The upsurge in the prices of goods and services has an adverse effect for the
Company since the capacity of ABS-CBN’s customers to pay depends on
their disposable income. Having higher prices for necessity goods suggests
that consumers will be left with lesser disposable income to spend for the
products or service provided by ABS-CBN. To mitigate this risk, ABS
enters into derivatives contract and may create price adjustment mechanism.
The Company could add a price adjustment mechanism to their existing
price model CPIRP or Cost Per Individual Rating Point that would take into
account the effects of inflation.
 Figure 11. Risk Radar Economic Risk: Interest Rate Hikes (ER2)
Bangko Sentral ng Pilipinas (BSP) has once again raised the interest rate for
ER1
0 the fifth consecutive increase; in November 15, 2018 BSP increase the
OR ER2 interest rate by 25 basis points to 4.7%. ABS-CBN’s assets are partly
1
2 financed with loans and a portion of those obligations are with floating
LR 3 CuR interest rates. The continuous additions to the interest rate could lead to
4 higher interest expense for the Company. To manage the impact of interest
CR MR rate changes in cost-efficient manner, it is the Company’s policy to enter
into interest rate swap contract whenever the need arises.
PR RR1
RR2 Currency Risk: Weak Philippine Peso (PHP) (CuR)
Insignificant damage and almost Investors are very optimistic of the economy of the Philippines, expecting
0
no probability of occurrence that the country has a robust economy, that the country is expected to grow
Minor damage with low at a high rate, but the recent news of the Philippine Peso depreciating made
1
probability of occurrence investors pull out their money out of the country fearing that it would
Moderate damage and
2
probability of occurrence weaken more against the US dollar. PHP was one of the best performers in
Substantial damage with the region, now the worst. The weakened peso could affect ABS-CBN’s
3 considerable probability of international operations; ABS-CBN could incur larger expenses for the
occurrence operations if the Company decides to finance its subsidiaries outside the
Significant damage with high
4 country with Philippine peso. To address this risk, entering in a future or
probability of occurrence
forward contract may minimize the impact of peso depreciation to the
Source: Team Analysis
company. (Figure 12)
Figure 12. Peso-Dollar
Exchange Rate from 2013 to Market Risk: Growing Presence of Online Advertising (MR)
2018 In the recent years online advertising has been on the rise while TV
60 advertising has been slow due to lowering TV viewership. Online
50 advertising sites like Facebook and YouTube is attracting customers from
the media companies like ABS-CBN. Losing long-term TV advertising
40 customers, the Company could lose a significant amount of its revenues
30 since advertising is the largest contributor to ABS-CBN’s revenues. ABS-
20
CBN could penetrate into online advertising by developing their existing
website and application that would contain its TV shows, programs, and
10 movies, and offer timeslots similar to airtime for advertisements (Figure 13).
0
201320142015201620172018 Regulatory Risk: Lenient Anti-Piracy Laws (RR1)
Source: Bangko Sentral ng Pilipinas Ever since the internet was introduced into the world, piracy has been
Figure 13. Online and TV spreading. Internet made movies and TV series be easily pirated and be
Global Advertising Spending easily accessed by the public. Piracy of ABS-CBN’s movies and TV series
(in billions USD) could affect the revenues because ABS-CBN does not receive any payment
300 when their products are pirated. To ease the risk exposure the Company
250 should file cases in order to be compensated with damages.
200
Regulatory Risk: MTRCB’s Filtering (RR2)
150
The Movie and Television Review and Classification Board or MTRCB
100 categorizes films, television programs, motion pictures, music videos, or
50 other audiovisual works; considering the treatment of the following aspects:
0 theme, language, violence, sex, nudity, horror, illegal drugs and other
factors. MTRCB can halt airing of TV programs or movies if deemed unfit
for viewing. ABS-CBN avoids producing content that would violate the
TV Online policies set by MTRCB.
Source: Team Analysis
Source: Zenith Media
Table 3. Risks & Mitigating Strategies Political Risk: Threat on Franchise Renewal (PR)
A threat of the ending the franchise of ABS-CBN in 2020 was announced
Risks Mitigating Strategy
Economic Risk by President Duterte. Duterte warned ABS-CBN that he will not sign the
Existing company franchise renewal due to not airing the PHP 2.8 Million worth of the
High Interest
policy on interest rate president’s political ads during 2016’s election. Also, he also announced in
Rates
swaps 2017 that he will charge multiple estafa charges against the Company. Upon
Enter into derivatives the expiry, negotiation with the president could prevent the non-renewal of
Soaring Inflation contract and create franchise. ABS comply with the necessary requirements needed in settling
Rate price adjustment
mechanism
the complaints.
Weakening Enter in a future or
Philippine Peso forward contracts Credit Risk: Immense Credit Exposure (CR)
Market Risk The credit risk of ABS-CBN comes from its financial and operational
Develop existing activities. In conducting financial activities, the Board of Directors must
Growing website and accredit the banks and/or financial institutions before transacting or acting
Presence of application and offer
Online timeslots similar to
the activity; only counterparties that have long credit history in the market
Advertising airtime for and outstanding relationship with ABS-CBN can transact with the
advertisements Company.
Regulatory Risk
File cases to the Credit risk from operating activities occurs when ABS-CBN extends credit
persons who are to recognized and accredited third parties. ABS-CBN applies a pay before
Lenient Anti- pirating the content of
broadcast policy to new customers. Also, receivables are monitored on an
Piracy Laws the Company to be
compensated with ongoing basis while taking into consideration the age of the receivable and
damages the current solvency of the individual accounts.
Prevent producing
MTRCB’s content that would ABS-CBN will be able to alleviate the risk by having credit insurance for
Filtering violate the policies set the credit given to customers. The insurance could cover all or part of the
by MTRCB defaulting account to lessen the loss of the Company.
Political Risk
Threat on Proper compromise
Franchise and negotiation with Liquidity Risk: Excessive Liquidity Requirement (LR)
Renewal the President. ABS-CBN is also prone to liquidity risk, the Company has weekly cash
Credit Risk planning. ABS-CBN also considers the maturity of financial investment and
Pay before broadcast financial assets, and projected operational disbursements. To manage
policy for new liquidity risk, ABS-CBN assesses its projected and actual cash flows
customers, ongoing
Immense Credit
basis for monitoring
regularly. There is a policy that indicates that the Company’s ending cash
Exposure balance of 3.5 Billion at any given time to compensate for 2 months of
A/R, and credit
insurance for the operational exigencies amidst occasional fluctuation of cash inflows. The
Company’s A/R Company’s procedure is to do a weekly cash planning to mitigate this risk.
Liquidity Risk
Continuous weekly Operational Risk: Impairment of Production brought by Fortuitous
High Liquidity
planning of cash
Requirement Events (OR)
planning
The Company’s activities can be easily disrupted by unforeseen events,
Operational Risk
Impairment of
natural or any disaster that may occur. ABS-CBN’s set or place of
Production Perform monthly production for its films and television programs can be damaged. Any
brought by maintenance on postponed production due to damaged production set will result into smaller
Fortuitous owned properties revenue. In order to mitigate the risk, ABS continually invest in
Events maintenance CAPEX and through insurance.
Source: Team Analysis
Sensitivity Analysis
To determine the effect of certain investment risks on the intrinsic value of
ABS, a sensitivity and scenario analysis is conducted. The first part of the
conducted sensitivity analysis determines the minimum changes in certain
variables that may shift the recommendation. After conducting such, an
evaluation of the impact of possible changes in the weighted cost of capital,
and stable growth rate to the target price was made (Table 7).

One of the variables that will significantly affect the valuation is the WACC
and growth rate. The WACC used to discount depends on the rates issued
by the BSP. Based on the sensitivity analysis conducted, if the growth rate
will increase or decrease by 50 basis points the analyst’s recommendation
will still be a buy, but if the WACC increased by 50 basis points and the
growth rate remained unchanged the analyst’s recommendation would still
be a buy.
Table 7. Sensitivity Analysis

Growth Rate
31.62 2.09% 2.59% 3.09% 3.59% 4.09%
WACC

7.25% 31.39 34.05 37.35 41.55 47.07

7.75% 29.31 31.51 34.18 37.49 41.71
8.25% 27.56 29.41 31.62 34.31 37.63
8.75% 26.08 27.66 29.52 31.74 34.43
9.25% 24.81 26.17 27.76 29.63 31.85
Source: Team Estimates