Kenyatta University CFA Institute Research Challenge Final Report_SGL_2014
1. CFA Institute Research Challenge
Hosted by
East African Society of Investment Professionals
KENYATTA UNIVERSITY
2. IMPORTANT DISCLOSURES APPEAR AT THE BACK
KENYATTA UNIVERSITY RESEARCH REPORT
This report is published for educational purposes only by students competing in
CFA ResearchChallenge
Date: 17th February, 2014
SGL Share Price and Volume Movement
Source: www.live.mystocks.co.ke/stock=SGL
Recommendation: HOLD
PriceTarget: KES 29.80
Ticker:Bloomberg: SGL: KN
Price:KES 28.50
2008 2009 2010 2011 2012 2013A 2014E 2015E
Revenue 2819 2768 3105 3175 3618 4750 5038 5944
EBITDA 671 607 743 564 663 987 1011 1234
EBIT 514 478 557 349 423 675 763 958
Net
Income
286 263 280 147 183 324 452 578
CFO 437 447 496 322 431 625 757 779
EPS 3.57 3.25 3.39 2.69 2.56 4.33 5.74 6.57
MARKET PROFILE
52 WeekRange:KES 23 – 39
AverageDailyVolume:
E.P.S.: KES 2.56
D.P.S.: KES 0.00
SharesOutstanding:81.73 Million
MarketCapitalization:KES2.33 Billion
BookValue/Share:KES5.00
P/E: 11.03
HIGHLIGHTS
Target Price: Webegin with an end of year targetpriceof KES.29.80,wecommence
the coveragewith a hold recommendation.SGLrankssecondin theMediaindustry
in Kenya:Owingto its futureprospectson expansivestrategy to eastAfrican region
as well asintroducingnewproducts, with theexistingonesbreakingeven weare
convinced thatthecompany issetto notonly sustain bottomlinebutalsoincrease
its revenues in notso far away future.Diversified productlinehasalso enabled SGL
to cushion againstturbulentmoments intheMedia industry.
Increased Revenue and Growth Margins: Thelasttwo years haveseen profitsand
EBITmargin rallyto record sustained increasedriven by newproducts,rebranding
as well asaggressivemarketing.Thecostshaveincreased though ata lower rateas
compared to profits and revenues.Weexpecttherevenues to growby 39%in this
year’s financial reportfromthefigureachieved for financialyear 2012.CAGRis also
expected to growby 18%from2013 to 2015.Weprojectan increasein EBITDA
margin of 86%by 2015mwhereas non financial costsincreaseby 54%.
Net FinancialPosition: The financial position isexpected to shiftup from3501.5
Million in2010 to 4934.8 Millionby 2015dueto theexpected growth in revenueof
products and marketshare.Theliquidity issetto improve formtheratioof 1.08 in
2012 to 1.55 in 2015:Hencein a perfectposition to embracetheefficienciesthat
comewith largeeconomies of scale
Valuation: With aid of theDiscounted Cash Flowmodel,utilizingFreeCash Flowto
the Firm(FCFF),wecameup with a targetpriceof ksh.29.80.Thisismostly
dependenton the company’sexpansionstrategy by introducingnewproducts and
also takingadvantageof newmarkets suchastheonlinereadershipnicheto
increaseitsincreased presencesand revenue.
Risks to Target Prices: Beingin media industry,perception especially inKenyan
politicallypolarized environment:politicsplaysa major role. Other risksmaycome
fromcompetition,foreign exchangevariation and production costsespecially due
to increased costof energy and rawmaterials.
STANDARD
MEDIA GROUP
LTD (SGL)
Source: www.live.mystocks.co.ke/stock=SGL
3. CFA RESEARCH INSTITUTE CHALLENGE 2014 17th February, 2014
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BUSINESS DESCRIPTION
The Kenyan media scene
Kenya has sophisticated,diverseand lively mass media sector characterized by television,radio,printand a thrivingnew media
such as internet and mobiletelephones.
The types of media can be classified broadly asprivate/independentmedia; the public statebroadcaster;the privatelocal
languageradio;community radio;the independent religious stations;thealternativepress;international media and new media .
They serve various and diverseinformation,education,religious,advertisingand entertainment needs of various segments of
the audiences.
However, media is concentrated alongthe equator and to the south of the country where the majority of the population live.
The northern partof the country is media scarcebecauseof the low population.Most media are operating out of Nairobi
although largemedia houses have news bureaus in various regions in thecountry.
The media has been thrivingdue to good economic performance over the pastfive years.The advertisingexpenditures on radio,
TV, newspapers and cinema has been growingsince2003 when sponsors spentSh6.6 billion,Sh8.4 billion in 2004,9.3 billion in
2005,Sh13.6 billion in 2006 and 17.4 billion in 2007 (IpsosSynovate,2009).
Standard media group is one of the leadingmedia houses in Kenya. Its journey started way back in the year 1902 when an
ambitious Indian contractor,Alibhai MullaJevanjee, whileworkingon the Kenya-Uganda Railway line,established the African
standard.Sincethen it has grown in leaps and bounds from its soleproduct of a singlesheet printed in black and white to its
current multi-faceted tabloids as well as owninga Television Station,a Radio Station among other products.It was the sole
operating newspaper in Kenya until October 1960 when itgot a rival.
As a testament of its excellence, it boasts of nurturingmore than 60% of outstandingjournalists in thecountry. Recently in May
14th 2013 duringthe second annual journalismexcellenceawards by media council of Kenya it scooped 22 of the 39 awards.The
company product, KTN, was also ranked 1st overall in social media useand 2nd on Kenya YouTube viewership after NTV according
to report released by Deloitte and Touché in February 2014.The listof awards is endless attributableto its exemplary
performance.
The company’s financial performancehas been improvingover the years.In un-audited financial resultspublished by the group
for the six months period ending 30th June 2013,the group more than doubled its EBT to stand atKES 223 million up from KES
107 million registered in the same period in the preceding financial year (Represents a 109% growth). This growth was achieved
on the backdrop of management’s turn around initiatives thatarefocused on expansion strategy.
Corporate Governance
The group is headed by a Board of Directors consistingof 6 Directors (havebeen drawn from different sectors of the economy),
3 of whom are independent Directors and 3 executive directors.The directors aresupported by 5 assistantdirectors who arein -
charge of their various Divisions.TheGroup also has also hired an in-houseLegal Counsel and Company Secretary. The Board has
three committees i.e. Audit committee, Remuneration Committee and Financeand Strategy Committee.
Ownership Structure
SNG Holdings limited,Trade World Kenya Limited and Miller Trustees Limited are the top three shareholders holdingaround
90.46% of the organization between them. See appendix 10 for a clearer picture.
Company Products
NewspapersThe Standard Newspapers: Daily and weekly publicationsnamely;The
Standard,The Saturday Standard and The Sunday Standard.
The County Weekly: an exclusivepublication frommain stream
media highlightingdevolved County specific news in Kenya.
The Nairobian: Launched in March 2013 into the market, a weekly
newspaper targeting city/urban dwellers.
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Kenya Television Network (KTN) became
the 1st privateT.V station in Kenya when
it was allowed to broadcastin Nairobi in
1989: acquired by the group in the year
1997.
The organization has a vision to be the leader in the media industry in the region, delivering world-class
produc
Radio Television
*2008: Group’s sharesre-admittedbacktothe Main InvestmentMarketof the thenNairobi Stock Exchange.
Radio Maisha,a new product of the
company, commenced its operations in
May 2010 as a Swahili station to capturea
media gap. It focuses on current affairs,
news and entertainment.
Think outdoor
A platformwhere by business can advertisethrough the bill boardswithin
Nairobi and the outcast towns such as Kisumu,Nakuru, Meru among others.
Publishers Distribution Services
Is the leadingdistribution armof international magazines which cover a wide
cluster of economics,lifestyle,business,sports...
Standard Digital World
It is an onlineplatformconsistingof repurposed editorial contenttargeting
local and Diaspora users.
THE STANDARD GROUP LIMITED JOURNEY
1902:
Started
1999:
Acquired
KTN TV
2008:
Rebranding KTN
and the
Standard
Newspaper
2010:
LaunchedRadio
Maisha
LaunchedThink
Outdoor
2013:
Launchedthe
Nairobian
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INDUSTRY OVERVIEW AND COMPETITIV E
POSITIONING
The media landscapein Kenya is rapidly changing –through a rapid geographical proliferation of media (especially radio) and the
number of regional media brands is expected to increase.Correspondingly,there has been an increasein advertisingclutter. The
Kenyan media consumer is bombarded with a lotof advertisements and to quote a reputable media researcher commenting on
advertisingclutter “if adverts were bullets,we would have no consumers left!”
In recent past advertisinghas gained a lotof momentum with its proven positivecorrelation to sales/revenueand this
information is bestchanneled through media. Effective advertisinginfers to informingthe public aboutthe right productat the
righttime through the rightmedium. Therefore, the right media selection is the crux of the success of the entire advertising
campaign.The effectiveness of a well-designed advertisingmessagedepends upon “when” &”where” itis realized. There are
“time” &”place” decisions.In shortwe may say that the success of advertisingdepends upon the rightselection of media, the
timely releaseof the advertisement message, its frequency and continuity,and the placeof its release.
Although newspapers are widespread in the major cities,most Kenyans still rely on the radio for news and information.There
are hundreds of FM stations broadcastingin English,Kiswahili and other indigenous languages.Radio is themost influential form
of media in Kenya as radios can befound in very remote areas,unliketelevisions which areconcentrated in urban areas and
watched by the wealthy with their satellitedishes.
Radio is the most accessibleand affordablebroadcastingmediumin Kenya. A survey from 2008 revealed that some 7.5 million
homes have radios and 3.2 million havetelevision sets.Of the homes with radios,5.5 million arein rural areas and 1.9 million in
towns. Further, 1.8 million television setowners are in rural areas while1.4 million arein urban centers. New media, internet
and cell phones aregrowing rapidly in terms of consumers and serviceproviders.From October to December, 2010, mobile
subscriptions grew12 per cent from 22.3 million to 24.96 million subscribers,which was the highestgrowth rate recorded tha t
year.
Despite the Radio being the most popular medium with the widest reach, Television is also popularand accessto itis
widespread. Many people who do not own a TV set at home still manageto watch television elsewhere. Television is a
particularly importantmedium for communicatingnews and information in Nairobi and other largetowns, where a choiceof
channels is available.Several international broadcasters also claimlargeaudiences in Kenya.
Standard Media Group Limited can be said to be the second largestmulti -media group as per market share (e.g. standard
newspaper at 30%) trailingNation Media Group with several Ipsos Synovate reports showing its products such the standard
newspaper, KTN T.V. and Radio Maisha trailingin marketsharewith regards to NMG. See appendix 6, 15,16 and 17. Standard
Media Group economic advantage can be underlined by their installation of a modern printingpress in 2007,and also the launch
of Standard Digital to capture the risingonlineviewership (seeappendix 18).
Industry Analysis:PESTEL Analysis
Political Factors
Stability of the government: Media growth and diversification can only beundertaken in a conducive political
environment. We noted that duringthe 2008 post-election violence, media companies had a problem in distributing
their daily printmedia publicationsto various parts of the country to their customers.Also, livecoverage was highly
monitored with messages of peace being aired across major media companies in equal intervals,several times.
Trade regulations: We expect the operationalization of the Media Act 2013 to curtail theaggressiveness of some media
companies especially thosewith investigativeseries (Standard’s Jicho Pevu & the Insidestory) for the untold stories of
the operations of the Kenya government. The bill also stipulates that45% of content on TV and radio - including
advertising - must be locally produced.
Economic Factors
Disposable income of buyers: The introduction of 16% VAT tax by the government on newspaper sales is expected to
lower sales of the newspapers distributingcompanies likeStandard Group Ltd, NMG, Media Max and Radio Africa
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Group. We ascertain thatthis has had a negative impactas ithas reduced the purchasingpower of the buyers and
hence affecting the sales volumeof printmedia publications.
Credit accessibility: The data we derived from CBK indicatethat the bank rate has been decreasingprogressively and
later on held steadily,this is as a resultof relatively strongshillingand a favorableinflation rate.With the bank rate
being fixed at8.5% presently and the commercial banks beingreluctant on reducingthe lendingrates, the end result
has been a reduction in the pace of media growth and development projects in the economy.
Interest rates: The highly maintained interest rates by commercial banks havecontinuously been inhibitivefor
borrowingand hence limited commercial projects for media houses.
Inflation: Inflation rates havebeen fluctuating in the lastfiveyears from with31% in 2008 and around 18% in 2011 but
eased to around 7% in 2013.This has led to a decrease in the purchasingpower of the consumers.
Unemployment Rate: The high level of unemployment in the country translates to a lower number of people are able
to providemarket for the media industry.An economically empowered people would acceleratethe sales volumedue
to their purchasingpower. Current unemployment rate is around 40%.
Social Factors
Population Demography: The largestpopulation of Kenya is dominated by the youth aged between 18 – 35 years. At
this bracket, most of the people are development oriented (always ready and willingto know what is happeningaround
them) and therefore, they seek a lotof information from the media. This provides ready market for the media industry.
Changes in Lifestyle: Long before, in the early 90s,the most reliableand affordableway of getting/sourcingfor news
and general information was through radio.However, we noted that this trend has gradually changed as citizens yearn
for more and reliablesources of information and thus the introduction of newspapers and television as opposed to
radio alone.
Technological Factors
New innovations and discoveries: In an industry characterized by high costs of operation,innovativeness is paramount.
The firms have been ableto adopt up to date technology as well as alternativemethods of distribution asa measureto
mitigate againstthe high costs.The use of technology (news feeds on mobilephones & tablets) has been instrumental
in this.
Environmental Factors
Environmental protection laws: Article42 of the Kenyan Constitution provides for right to have the environment
protected for the benefit of present and future generations and the right to a clean and healthy environment
.Additionally Chapter 5 of the constitution is fully dedicated to land and environment and specifically Article72
mandates the parliamentto enact environmental legislation in order to fully operationalize Chapter 5. Numerous Acts
of Parliamentarein placeto deal with the matter of environmental management. SGL procures all its inks,papers for
publishingand other raw materials fromoutsideKenya. In waste management aspect, SGL as regards the unsold
publicationsissold off ataround KES 20 per kg as inputs to other industries such sanitary makers.
Legal Factors
Employment Regulations: The group operates within the requirements of the Constituents Charter, its Statutes and
General By-Laws and adopts certain universally accepted principlesin the areas of human rights and labour standards..
SGL is believed to be among the best employers, that is accordingto the industry standards/practices and this isevident
by the kind of talent (human capital) they attract, young and vibrant.
Media repulsive bills and legal processes: an arguablepointwhich can also bepolitical,recent media bills such as
Media Council of Kenya Bill 2013 and Kenya Information and Communications Amendment Bill 2013 seem to muzzle
media operations in Kenya. A topic now is the mooted digital migration whosehandlingisnowa matter in the courts.
From above analysis we can infer that, although there is harsh market condition, there lies an environment nonetheless
where SGL can thrive with the right kind of policies plan and strategies to insulate it from the effects of the environment.
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COMPETITIVE ANALYSIS:PORTER’S 5 FORCES MODEL
We evaluated the competitiveness and thus attractiveness and profitability of the industry as follows:
Intra industry competitive Rivalry: Increasing
In the past,NMG has enjoyed a bigshareof the market evidenced by its market leadership.Wehowever, expect this to change
overtime as the media industry approaches maturity.In addition,firms likeStandard Media Group are heavily expandingtheir
capacities and whileimprovingcostefficiencies.Brand loyalty is also key in this industry.Rivalry dueto talent wars and brand
visibility isalso evident.
Threat of new entrants: Increasing
The media industry is a highly capital intensiveindustry which requires companies to make significant CAPEX investments. This
acts as a barrier to entry in the industry.However, we note that the market for media (specifically radio & newspapers) is readily
availableand hence an assuranceof profitability,though in the longterm. Realizingbrand loyalty is however important.
Threat of substitute products: No effect
Media cannotbe substituted by any other product. The consumers are therefore limited to its subscription and as such,they
cannot influenceits market price. Whatthere is,a highly differentiated productmarket and intensivecompetition.
Bargaining power of buyers: Stable
With the high demand of information (media),buyers are not ableto determine the priceof the product as the supply is still
lower than the overall demand. Consumers are high pricesensitive.Standard Media Group Ltd is therefore at not liberty to
increaseprices of its products in casethe costof production goes up. We consider Standard Media Group is a pricefollower,
thus itshould consider priceadjustments made by the market leader Nation Media Group.
Bargaining power of suppliers: stable
A competitive advantage Standard Media Group has over the other companies is the factthat itis a local company and
therefore itis ableto produce products and services with a touch as well as edge for the local market.This has enabled it to
operate in full integration and hence cut down its production costs.Thus itis not affected by the bargainingpower of sellers.
From our analysis above we can conclude that the industry is not mature as we expect to see a lot of changes as various
media houses seek to outdo each other in quest to be market leaders. We predict a scenario of continuously rebranded
refurbished products with appeal to different market niche. A latest example is online journalism and reporting; as more
Kenyan public is getting connected to the internet,Media groups will seek to exploit these: Case study YouTube and social
sites especially the popular Face book. See appendix 14 & 18.
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INVESTMENT SUMMARY
We jumpstartthis partby rating SGL as a Hold company with a target priceof KES 29.80, which depicts an 4.5% upsidefrom the
current sharepriceof KES 28.50. Being the Second largestMultimedia Group in Kenya with an estimated market shareof 30%
and a market capitalization of KES 2.33 Billion,itprovides a stablereturn yet also an untapped potential for growth given
untapped markets nichein the country.
In 2012 Publishingaccounted for 85% of total sales in SGL. The Management wishes to further grow the publishingsegment
whilealso havingthe broadcastingsegment break-even. Publishing turnover is targeted to grow by 56% to 2015 from 2012,but
will reduceto justover 81% by 2015. The company targets increased revenues from Kenya which areexpected to stand at over
90% of total sales in up to at least2015.
SGL invested over 400Millionsin installingnew state of art publishingand printingpress in year 2007;Printmanagers on site
said they produce an average 100,000 copies per day with the machines said to be 70% utilized.The FinanceDirector rubber
stamped this by alludingto an existinginefficiency with regards to processes such as production of publications.
SGL expects to increaseits reach of PrintMedia (newer products such as the Nairobian,the County and Governor), Radio (plans
underway to get new frequencies) and also KTN (Overdrive revamp of programs- introducinglocal programs). This expansion
strategy is expected to increasethe Compounded Annual Growth Rate by 18% in the period between 2013 and 2015.The World
Bank projects a growth rate of 5.2% in 2014 to increaseto 5.4% in 2014.
Efficiency is somethingbeing considered by management: plans areunderway to improve processes efficiency specifically in
PublishingSegment with regards to the daily unsold copies,Broadcastingsegment too will beconsidered and this is expected to
lower the total costof production by 10%.
SGL prides itself to be the only local multi-media group,and unlikeMulti National Companies,the costs as regards to decision
makingare less due to fastresponses.SGL acquired new vehicles for distribution of daily products to the market and has set up
agents in bankers to reduce costs associated with distribution as well as to control the whole process from production plantto
final consumer.With the expected shiftto digital platformrelayingcosts areexpected to reduce but viewership maybe limited.
From above platformand also the information that Standard Media Group plans on establishingown media lab to train its
employees, the group stands at a vantage position to safeguard its position as a leading multi-media group but also therein lies
the prospect of growth with alignment of investments and improvement of efficiency levels.We are projectingan increasein
EBITDA margin by 86% by 2015 from 2012.
The followingarethe investment in subsidiaries (unquoted) as at year end 2012
Principal Activity Shareholding KES ‘000’
The Standard Limited Dormant 100% 3,398
Baraza Limited Broadcasting 51% 92
Agency Sales and Promotion Limited Dormant 100% 2
Toads Media Group Limited Leasing 100% 66,875
70,367
The investments in the Subsidiaries arecarried atcost. Toads Media Group Limited holds the licensefor frequency for Radio
Maisha,which operates as a division of The Standard Group Limited. Baraza Limited is the entity through which the group
secured its productKTN TV.
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Comparison between SGL and Its Rival (NMG) listed on NSE and also with NSE 20 share Index
Source: www.live.mystocks.co.ke/stock=SGL Source: www.live.mystocks.co.ke/stock=SGL
VALUATION
We have used Discounted Cash FlowModel: Free Cash Flow to the Firm (FCFF) - this method is suitablefor SGL because the
Group firstdoes not consistently pay dividends and the authors aresatisfied thatfree cash flows align with profitability within
the next two years (to end 2015).Accordingto our detailed DCF analysisweexpect the target priceof KES 29.80
We see the Free Cash Flow to Firm growing at 8.54%, interest rates areseen to come down with stringent monetary policiesset
by Monetary Policy Committee in Kenya. EBIT Margins areforeseen to increase
The DCF model is sensitivemostly to the followingfactors:
Sales: The forecastof growth in sales is based on projected TV advertisingrevenue increaseby CAGR 18% as postulated by PWC
in the report Global Entertainment and Media Outlook.
Residual growth rate is based on:
(1) Forecasted condition in the Kenyan Media economy as per World Bank Forecasted report on year 2014.
(2) Development of new SGL products,growing market shareas well as expected venture into wider East Africa region
(3) High expected return on equity in year’s 2014E and 2015E
Dividend policy: It is assumed that SGL will continueits lowor no dividend policy for the foreseeable future but instead seek to
Capex: Due to new regulations such as digital migration and to stay afloatin the demanding Media industry.
Scenario Analysis
Optimism 34.27 +15%
Base/Average 29.80
Pessimism 23.84 -20%
We see the Free Cash Flow to Firm growing at 8.54%, interest rates areseen to come down with stringent monetary policiesset
by Monetary Policy Committee in Kenya. EBIT Margins areforeseen to increase CAGR 31.32% from 2012 to 2015.
Thus from a target price as 29.80 we rate itas a HOLD. (See working out in appendix 11)
From our analysis wehad builta model
Buy: 39 - 54
Hold: 24 - 39
Sell:10 – 24
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FINANCIAL ANALYSIS
In this section we present the assumptions in which we baseour valuation.Weuse 2008-2012 CAGR. In addition
The group is splitinto three segments for financial reporting
Publishing
TV Broadcasting
Radio Broadcasting
Accordingto our forecasts,profitability is expected to grow by an EBIDTA margin from 18.32% of sales in 2012 to 20.76% of sales
in 2015 (with revenues themselves growing from KES 3.6 billion to KES 5.9 billion),fuelled by:
Increase in reach of established publications products and penetration of new publications.
Breaking even of TV Broadcasting Segment and also cut back on Radio Broadcasting Losses:
Installation of world class printing press and Studios
Financial structure: Not fully exploited.
In linewith our estimates, the Net Financial position will increasefromKES 2382.8 Million in 2012 to KES 3729.0 Million in 2015
due to increased retained profits which are ploughed back to the business.This will beas a resultof improved revenue and also
thanks to operational efficiencies.
Financial Ratios
2008 2009 2010 2011 2012 2013A 2014E 2015E
LIQUIDITY
INTEREST COVER
RATIO
6.0 4.7 5.3 3.0 2.7 3.9 4.9 5.5
CURRENT RATIO. 1.3 1.3 1.3 1.1 1.1 1.2 1.1 1.5
ACID TEST RATIO 1.0 1.2 1.0 0.9 1.0 0.8 0.7 0.9
PROFITABILITY
EBITDA MARGIN 23.8% 21.9% 23.9% 17.8% 18.3% 20.8% 20.1% 20.8%
EBIT MARGIN 18.2% 17.3% 17.9% 11.0% 11.7% 14.2% 15.1% 16.1%
NET PROFIT
MARGIN
10.1% 9.5% 9% 4.6% 5.1% 6.8% 8.9% 9.7%
TOTAL ASSETS
TURNOVER
1.0 1.0 0.9 1.1 1.2 1.2 1.2 1.2
R.O.C.E 0.4 0.3 0.2 0.2 0.3 0.2 0.2 0.2
SOLVENCY
TOTAL DEBT RATIO 62.8% 58.0% 53.5% 52.9% 47.5% 43.9% 42.0% 35.3%
LONG-TERM DEBT
RATIO
31.2% 29.6% 22.2% 18.9% 15.5% 13.4% 12.2% 10.8%
11. CFA RESEARCH INSTITUTE CHALLENGE 2014 17th February, 2014
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Liquidity
Ideal Acid test ratio is 1:1, the group has been ableto maintain such over the last5 years though there is a need for it to create
a safety margin to avoid goingdown below it.
Ideal Current Ratio is 2: 1. The group has not been ableto achieve that, mainly due to high overdrafts. The ratio droped to as low
as 1.1: 1 in 2012,our forecasts shows that itwill attain 1.5:1 by 2015.
Interest coverage has been droppingover the years from high of 6 times in 2008 to as lowas 2.7 times in 2012,and we foreca st
it to riseto 5.5 by 2015.
Profitability
EBITDA Margin,EBIT Margin and Net Profit Margin havebeen fluctuatingover the years but we see a trend forming from 2011
onwards.
R.O.C.E. and Total Assets Turnover have relatively been the same at0.2 and 1 respectively and this trend expected to be
maintained.
Solvency/Leverage
The group total debt ratio has been decreasingover the years (From 62.8% in 2008 to 47.5% in 2012 and we projectthis to
further reduce to 35.3% by 2015),affecting its gearingpositively:meaningthe company has been financingits assets less from
borrowings ,thus the company will be ableto withstand adversetradingtimes in the future.
From above we can see that the group has maintained a return on capital employed of 0.2 over the years,shareholders have
been ableto realizea return on their capital,though management has not been improvingin maximizingthe shareholders goal
and this is evident from the constantratio over the years. Though the group profits havedeclined in 2011 and 2012 they are
expected to improve in the future, however the group operations havebeen profitable,meaning the group has been ableto
cover all its expenses.
From the analysisof asset turnover we can conclude that the management to some extenthas beenable to utilize
available financial resourcesthough not satisfactorily, alsothe managementefficiencyhasnot improved and this
seenbecause the ratio has remain constant over the years a trend that is likelyto persist. We can conclude the
presentstand is okay and the future looksparticularly bright.
12. CFA RESEARCH INSTITUTE CHALLENGE 2014 17th February, 2014
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INVESTMENT RISKS
This section illustrates themain risk that may affect our target price.
Political risk
Political whims: The group especially beinga reporter of political conditionsfaces a greatpolitical risk in year in year out since
Kenyan populacehave shown over the years strong political association.Kenya market accounted for more than 90% of its
revenues in 2012 as such a major contributor.From the past,the Kenyan economy normally performs poorly duringelection
years but contrastto these observations,the media industry records significantly high revenues due to political advertisements.
The 2007/8 post-election violencethough affected negatively the whole Kenyan economy, includingtheMedia industry.We
therefore proposethat the Standard Media Group diversifies into other markets especially with the introduction of EAC
community protocol as a way to hedge its risks fromits dependent sourcemarket, Kenya.
Strategic risks
Excessive reliance on publishing for profits and/or fierce competition from existing companies
The company strategy lies solely on the television and newspaper division.This segment is expected to be more competitive
after new entrants likeMedia Max acquired The People newspaper. Currently it faces competition from RMS and NMG who
have announced capacity increasein the future. The media industry sector earnings aresaid to be growing steadily due to
maturity of the industry,this is expected to substantially to transformone the digital migration iseffected sincethere wi ll bea
possibility of new entrants.
Economic growth
The East African economy is expected to grow at5% next year. Risein inflation has necessitated tighter monetary policy through
increaseof Interest Rates. Media industry which is the demand driver for radio,television and newspaper, depend highly on
income and as the supply for money is lowered people will shy away from media publications such as newspaper.This may be
overrun by the increased public awareness or rather information appetite.
Financial risk
Fluctuations in foreign exchange
The group is exposed to foreign exchange fluctuations arisingfromvarious currency exposures primarily with respect to the US
dollar,Euro,South Africa Rand and Grand British Pound.The foreign exchange risk arisesfromfuture commerci al transactions,
recognized assets and liabilities. As authors we consider the risk very minimal.The Kenyan currency has shown strong resilience
and 1% fluctuation would have had a 0.7 million on EBT.
Inflation: On the other hand,inflation is expected to remain stablemovingforward. This may insignificantly affectthe
company’s real earnings.There may be no major changes in its costs and thus, it will bereluctantto pass the costs to consumer
because of stiff competition from new entrants who use pricingstrategy to get market share. The company has invested in
efficient production processes to minimize costs.
Interest rates
The Kenyan economy is experiencinghigh interest rates in comparison to its almostequal tradingpartners and this underpins
the group’s profitability sincethe financecostrises which eat up the profits.In 2012 the company average interest cost wa s
18.50% which will risewith increasein interestrates.
Operating risk
Increase in Production and Broadcasting costs
Cut-throat competition in broadcastingbusinesscoupled with increased energy costs (electricity) will push up production costs.
It is of importance noting the Group relies heavily on new technology to keep abreastwith competition and technology is
changingever so fast.
From the above observations political,strategic,financial and operatingassociated risks,wesee a stableoperating platform
putting into context Board participation in management of risks and implementation of policies to mitigatethe said risks.For
2012,market risk (with regards foreign exchange risk,pricerisk and cash flowand interest risk) was minimal with estimated
adverse of KES 2.26 million,creditrisk hasbeen fully provided as well as liquidity risk asreported in their 2012 annual report.
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Appendix 6:Newspapers inKenya
Title Publisher Circulation Frequency
Daily Nation Nation Media Group Daily 180,000 (PE)*
The Standard Standard Media Group Daily 110,000 (PE)
The People Media Max Daily 65,000 (PE)
Taifa leo Nation Media Group Daily 44,000 (PE)
Business Daily Nation Media Group Daily 15,000 (PE)
The Star Radio Africa Group Daily 10,000 (PE)
The East African Nation Media Group Weekly 40,000 (PE)
The County Weekly Standard Group Ltd Weekly 23,000 (PE)
Sunday Nation Nation Media Group Sundays 280,000 (ABC)**
Sunday Standard Standard Group Ltd Sundays 150,000 (PE)
The People on Sunday Media Max Ltd Sundays 38,000 (PE)
Taifa Jumapili Nation Media Group Sundays 15,000 (PE)
Source:
Appendix 7:Access toMedia(T.V. and Radio...) & ICT Sources
Source:
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Appendix 8:Weekly Use of InformationSources
Source:
Appendix 9:Mediumof negotiated Advertising Revenue
Source:IpsosSynovate
Agency Citizen
TV
KTN TV NTV KBC TV Kiss TV K24 ETV
Scan 69% 76% 78% 77% 58% 72% 60%
Ogilvy 11% 11% 7% 12% 1% 27% 11%
Young 11% 4% 8% 8% 0% 1% 11%
Other 9% 9% 7% 4% 40% 0% 18%
Total 100% 100% 100% 100% 100% 100% 100%
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Appendix 10:OwnershipStructure (Top10 Shareholders As at 31st
Dec 2012)
Shareholders Percentage
1 S.N.G. Holdings Limited 69.03%
2 Trade World Kenya Limited 10.90%
3 Miller Trustees Limited 10.53%
4 Kirtesh Premchand Shah 0.53%
5 Baloobhai Chhotabhai Patel 0.49%
6 The Standard Group Limited ESOP Trust 0.33%
7 Denroma Investment Limited 0.29%
8 Julius Gechau 0.27%
9 Savitaben Velji Raichand Shah 0.25%
10 Eufrazio Juliano Goes 0.24%
Others 6.61%
Source: SGL Financial ReportsandAuthorsestimates
Appendix 11:Determinationof Free CashFlow to Firm(FCFF)
2008 2009 2010 2011 2012 2013A 2014E 2015E
CFO 437.0 447.2 496.4 322.5 431.3 624.7 756.9 778.7
Add: Interest Expense * ( 1 – 0.3) 59.6 71.1 73.4 82.2 110.5 124.2 108.6 122.4
Less: Investment in Fixed Capital. (501.9) (485.9) (215.0) (512.6) (274.1) (495.1) (550.1) (670.7)
FCFF (5.3) 32.4 354.8 (107.9) 267.7 253.8 315.4 230.4
Source: SGL Financial ReportsandAuthorsestimates
Intereston debt: Authors take a positionkd 18.5%
Cost of Capital: ke = (1 + Bond Interest2013-2015 )(1+ InflationRate2013-2015)
= (1 + 0.11553)(1 + 0.071) – 1
= 19.47%
Weightofequity= 0.80 WeightofDebt = 0.20 WACC= 19.28%
UsingDCF, Enterprise Value2014 = FCFF = 315.4 = 2,936.7
wacc - g 0.1928 – 0.0854
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Equity = 2936.7 – Non- Current liab
= 2936.7 – 501.3
= 2,435.4
Price per Share = 29.80
Source: SGL Financial Reports and Authors estimates
Appendix 12: Use of Social Media Kenya
Source:IpsosMediaCT;Year 2012
Appendix 13:Radios inKenya
Source:IpsosMediaCT;Year 2012
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Appendix 14:TV’s in Kenya
Source:IpsosMediaCT;Year 2012
Appendix 15: Newspapers inKenya
Source: Ipsos MediaCT; Year 2012
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APPENDIX16:MediaConsumptionHabits Trend
Source: KARF MediaReport 2013
APPENDIX17:Kenyan YouTube channel viewership
# Channel Subscribers Video views
1 NTV Kenya 153,770 150,695,575
2 KTN Kenya 147,066 60,097,755
3 Kenya CitizenTV 126,780 44,600.159
4 K24TV 78,128 24,604.626
5 Capital FMKenya 11,036 4,943,209
Source: www.socialbakers.com
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DISCLOSURES:
Ownership and material conflicts of interest:
The authors and/or a member of their household, of this report do not hold a financial interest in the securities
of SG.
The authors and/ or a member of their household, of this report do not know of the existence of any conflicts
of interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the authors of this report is not based on investment banking revenue.
Position as an officer or director:
The authors and/or a member of their household, does not serve as an officer, director or advisory board
member of the subject company.
Market making:
The authors do not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public
and believed by the authors to be reliable, but the authors do not make any representation or warranty, express
or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any
investment decisions by any person or entity. This information does not constitute investment advice, nor is it
an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a
recommendation by any individual affiliated with EASIP, CFA Institute or the CFA Institute Research
Challenge with regard to this company’s stock.
CFA Institute Research Challenge
