Eugene Investment & Securities lowered its target price for CJ ENM (035760.KS) to 70,000 won from 80,000 won. The brokerage cited first-quarter earnings that significantly missed market expectations, continued weakness in TV advertising, and an anticipated gap in content deliveries from Fifth Season.
"We are adjusting CJ ENM's target price to 70,000 won, lowering both our earnings estimates and applied multiple for this year," Lee Hyun-ji, an analyst at Eugene Investment & Securities, said in a report Thursday. CJ ENM's first-quarter revenue rose 16.8% year-on-year to 1.33 trillion won ($976 million), but operating profit came in at just 1.5 billion won ($1.1 million). The results fell well short of both market consensus and Eugene Investment & Securities' estimates, marking an earnings shock.
Lee accordingly lowered her full-year operating profit forecast for CJ ENM to 128 billion won from 179 billion won. "With TV advertising revenue declining for a fourth consecutive year, the TV ad slump is expected to continue in the second quarter due to the impact of the World Cup," she said. "Rapid growth in digital is needed to offset the weakness in TV advertising."
The core of the earnings weakness lay in the media platform and music segments. Tving's top line expanded on the back of expanded partnerships, the success of the World Baseball Classic (WBC), and exclusive content, but content acquisition costs and amortization burdens pushed the unit to an operating loss of 19.2 billion won. TV advertising revenue also fell 20.7% year-on-year amid a slowdown in the ad market and the impact of the Olympics, marking the fifth consecutive quarter of decline. As a result, the media platform segment posted an operating loss of 21.2 billion won.
The music segment also recorded an operating loss of 5.8 billion won, weighed down by reduced activity by Lapone artists in Japan, the absence of large-scale concerts, and continued investment in Mnet Plus. The film and drama segment, however, narrowed losses as Fifth Season delivered three TV series, and overseas content sales added to the growth momentum. The commerce segment also delivered stable results on the back of increased mobile gross merchandise volume.
Lee said the pace of Tving's profitability improvement will be the key to any share price recovery going forward. "Tving has changed the amortization period for content rights to four years from two years starting in the first quarter of this year, which will disperse approximately 8 billion won in costs per quarter," she said. "In the second quarter, subscribers and traffic are expected to grow thanks to the KBO season opener and anticipated original content, and with advertising revenue also growing, the platform should be able to reach quarterly break-even (BEP)."
Fifth Season, however, is cited as a drag. A clear gap in series supply is expected throughout the year following the delivery of three series in the first quarter. "The company is considering various sales strategies to fill the gap, but without clear growth drivers, an operating loss will be unavoidable," Lee said.
