Investment Analysis | Radio Jamaica Ltd
Despite the positive performance of the Radio Jamaica Ltd. during the first nine months of operation of financial year 2020, it is our opinion that financial year 2021 (FY 2021), and potentially beyond, may be one of the most difficult years of operations that traditional media companies, such as RJR, will have to face. The headwinds which the company is likely to encounter in the forthcoming financial year are likely to be a consequence of the economic fallout stemming from the Coronavirus or COVID-19 pandemic.
Admittedly, at this stage of the global health crisis, we find ourselves ill-equipped to fully grasp the full potential fallout stemming from the aforementioned pandemic. Nonetheless, based on currently available information it is our opinion that RJR is likely to suffer serious economic setbacks in FY 2021, and potentially beyond, as a result of their clients/potential clients culling their marketing budget in response to the economic hardship which have already began to manifest as a consequence of the health pandemic and as collateral consequences of policies implemented to curtail the spread of the virus. The negative consequences on the company’s earnings are likely to be exacerbated if, similar to in the past four (4) financial years, RJR’s management team continues to demonstrate an inability to control costs. Between FY 2016 and FY 2019, RJR’s operating expenses surpassed its gross profit in all but one year despite revenue growing each successive year. This can partially be excused because some of the expenses incurred were non-cash expenses and consequently, the company still generated positive operating cash flows during the period. However, going forward, during a period when it is anticipated that revenue will be squeezed (decline), continuation of the same management strategy could potentially erode shareholder’s value. However, cutting expenses may not be as simple as one may think. One of the most obvious expenses to curtail in these types of scenario is that of labour (staff). However, inflicting too deep of a cut could risk damaging what we speculate is already weak staff morale in the wake of the pandemic. Furthermore, cutting too deeply could also negatively impact the ability to seize opportunities in the early stages of economic recovery. Therefore, it is our opinion that management has an unenviable tedious task of trying to manage/balance all these opposing variables during an unprecedented time.
It is our opinion that the headwinds facing the traditional media companies, such as RJR, may also accelerate the, already in progress, paradigm shift of marketers transitioning to digital or non-traditional mediums of advertising. The fact is non-traditional sources of advertising are somewhat better equipped to ride our economic downturns. Bloomberg Intelligence estimated that in the United States during the global financial crisis in 2009, print advertising sales and television advertising sales declined year over year by 18% and 7.0%, respectively. Conversely, internet advertising revenue grew year over year, albeit at a slower pace than brisk 20% rate of growth prior to the crisis, by 5.0%. In the wake of the Coronavirus pandemic, it is our opinion that we are likely to see a similar scenario with non-traditional/digital mediums further eroding the already weakening hold traditional media has on the advertising market. This will likely be aided by the fact that non-traditional advertising mediums’ content can be targeted and measured, and can usually be produced/distributed at a fraction of the cost and effort. Additionally, they require smaller/no production crew which would make the medium less susceptible to social distancing/quarantine protocols which has been instituted to curtail the spread of the virus. Additionally, non-traditional mediums usually require a shorter lead time prior to the launch of the marketing campaign, making them more agile. This is evidenced by many marketing campaigns that we see locally capitalising on viral moments and trends. These factors are likely to make an already competitive landscape even more competitive.
To the best of our knowledge, presently, RJR stands unready to shift to the digital space, it is just not what the business model is built on and such a transition would likely be very difficult, time consuming, and expensive. The exposure that the company has to the digital space, 1spotmedia, the online gleaner, etc., can essentially be boiled down to traditional media platforms presented online. Furthermore, 1spotmedia suffers from the Achilles’ heel of not having a sizable archive of originally produced content which could serve to attract viewers or which the company can attempt to monetize either through direct subscriptions or by selling ad space on the web page.
Therefore, we forecast RJR to generate losses of approximately J$245M in FY 2021. This would imply a fair value of between J$0.93 and J$1.15 on a book value basis, suggesting that the company is currently being sold at approximately 10.0% to 27.0% premium relative to our computed fair value. Therefore, due to the risks associated with the company which have been exacerbated by the Coronavirus pandemic coupled with the pre-existing long term concerns over the viability of traditional media outlets relative to non-traditional media outlets, we are recommending RJR as a SELL at this time.
|Closing Price 20/05/2020||J$1.28|
|Estimated Fair Value||J$0.93 to J$1.15|
|Potential Return||-27.34% to -10.16%|