- MNC Investama is majority owner of the number 1 ranked TV company in Indonesia.
- The company’s core media business is a “defensible market position” generating solid cash flow.
- These short maturity (May 2018) Yankee bonds offer a high 12% averaged return in US dollars.
Each week we screen thousands of corporate bond listings to find what we believe is currently the best corporate bond for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. This week, we look at short 4-year Yankee bonds (in US dollars) from PT MNC Investama Tbk (OTC:PBHKF), a profitable company with solid cash flows, deriving 85% of its revenues from its majority ownership of dominantly positioned companies and in the Television, Pay TV, and Media business markets of Indonesia. As a result of its discounted price of about 80, this B2/BB- rate bond is currently indicating an astounding yield, greater than 12%. In addition to seeing these bonds as a means for unique diversification into the emerging Indonesian economy, the following review shows why we think these short, 48 month, lesser known high yield notes are a superior choice to strengthen cash flow, boost yields, and preserve capital within our high yielding managed income portfolios, Fixed-Income1.com and Fixed-Income2.com.
US dollar bond denominated In Indonesia
Indonesia is an archipelago with 245 million people cover with 5.78% GDP growth in 2013. Its public debt is only 23.9% of GDP in 2012. Well below the US public debt of 87% and the USA has a split AAA/AA rating. Indonesia with higher growth and less debt has a split rating and of BBB and BB making it hard for even a very strong financial Indonesian company to receive a rating above the BB level.
Indonesia landmass is an archipelago consisting of over 17 thousand islands and the TV is the most effective and efficient media platform today to promote products and services on a national scale.
A look at the issuer
PT Bhakti Investama Tbk was established in Surabaya in November of 1989 and moved its headquarters to Jakarta in February 1990 and focused primarily on capital market-related activities. The company lists its stocks on the Jakarta Stock Exchange and the Surabaya Stock Exchange (now merged into the Indonesia Stock Exchange) through an Initial Public Offering in 1997, and its scope of businesses now spans Media, Financial Services, Energy and Natural Resources as well as Portfolio Investments. It is currently the major owner of the largest and highest rated media company in the Indonesia, PT Media Nusantara Citra Tbk (OTC:PTMEF), which has consistently been the number 1 ranking TV company since its inception and control, capturing a whopping 40% of the free TV market. BHIT also owns both a direct and indirect stake in PT MNC Skyvision Tbk, the leading pay TV operator in Indonesia. Effectively, BHIT's current direct and indirect ownerships in MNC and SkyVision are 35.8% and 43.8%, respectively. In May of 2013, PT Bhakti Investama Tbk was officially changed to PT MNC Investama Tbk, as a result of expectations to enhance the profile of the company and solidify synergies within MNC Group.
In the 3rd quarter of 2013, about 85% of the consolidated revenues and 95% of the profits for BHIT came from businesses that include broadcasting media, subscriber media, print media, radio, telecommunications, agencies, and online shopping. A remaining 7% of revenues comes from its Investments and Insurance subsidiaries, while 5% is attributable to operations in Indonesian Energy and Natural Resources. In its May 2013 Rating Action, Moody's recognized the company's core media business as a "defensible market position" generating solid cash flow.
MNC is relatively small compared to media giants like News Corporation (NASDAQ:NWSA) which is one of their largest international competitors. However, it is surprising that one of the top MNC rated local shows would license a show from Twenty-First Century Fox (NASDAQ:FOX), a competitor, then add local talent and remake the program into Indonesian Idol, a local version of American Idol broadcast on the Fox networks. Indonesian Idol, a MNC production, is one of Indonesia's top reality series that has added top new contract recording artists to MNC's music division. Thus, by adding local talent, MNC has achieved more success in Indonesia than the original founding show.
MNC has grown by focusing on creating local Indonesian content, while most of its competitor's gave focused on providing canned international content. This has allowed MNC to dramatically expanded its network both organically and by acquisition. It has become the most integrated media company in Indonesia, making it a one-stop-shop for global advertisers in search of complete advertising and marketing solutions capable of reaching Indonesia's broad markets in a very effective and cost efficient manner. MNC has the largest content library in Indonesia with over 120,000 hours of the most valuable content and increasing by over 10,000 hours annually. Since it also owns the majority of the programs outright and is added to its growing content library. This helps MNC added filler content helps them launch additional new local based cable channels and supporting shows. They also seem to be better at understanding their own cultural biases and thus the target female audience is a very significant component of their viewers as the majority of products being advertised are mainly targeted at housewives/female. As the market leading media business, MNC is expected to provide stable cash flows and a stream of cash dividends, which will ultimately support the debt servicing capabilities of BHIT. As a result, the current operating performance and credit profile of the media business (MNC) provides an anchor for BHIT's credit worthiness. A further review of its financial performance is in the sections below.
As an investment holding company, BHIT's investment strategy is perceived as being geared towards high growth, high return businesses. As a result, its management envisions the non-media related businesses contributing around 25-30% of consolidated revenues by 2015 as these grow and develop, reducing the contribution from the media businesses to around 65%-70%. BHIT's Financial Services segment recorded 26% revenue growth from its financing, securities and insurance business. This result was achieved in the midst of a financial turmoil during 3Q2013.
Outside of its core media business, BHIT holds:
- 89.77% interest in PT MNC Kapital Tbk., a financial services provider.
- 99.9% interest in PT MNC Energi Tbk, an energy & natural resources company, and
- 26.2% interest in MNC Land, a real estate business with significant proposed developments.
IN IDR trillion
9 months 2013
9 months 2012
Investment & Insurance
Indonesians prefer to watch TV than to read, watching 5 hours of TV per day even though there is only a 59% and growing TV penetration, and with only 30.2% internet penetration. Contributors to BHIT's revenue were mainly from content and advertising based media which accounted for 59% of consolidated revenues equal to 4.95 Trillion Rupiah (US$438 Million), subscriber based media contributed 26% equal to 2.23 Trillion Rupiah (US$197 Million), financial services contributed 7% equal to 600.18 Billion Rupiah (US$53 Million) and mining contributed 5% or equivalent to 415.28 Billion Rupiah (US$36.7 Million), respectively. Earnings before interest, taxes, depreciation and amortization (EBITDA) grew 19% per year, in the first three quarters from 2012 to 2013.
Interest Coverage Ratios
MNC financial cost for the period ending Sept. of 2013 was 526 Billion Rupiah (US$46.5 Million), and their earnings before tax was 1,574 Billion Rupiah (US$139.2 Million), or about 3 times greater than interest expenses.
We like companies with lower debt to cash ratio
Total financial debt at the end of Q3 2013 was 8,720 Billion Rupiah (US$771.2 Million), the majority of which is in US dollars, while cash and short-term deposits were 1,059 Billion Rupiah (US$93.6 Million.)
We like companies that have good balance sheets
MNC Investama currently appears to have an enterprise value of about 20 Trillion Rupiah (US$1,770 Million), indicating a debt to equity ratio of about 43.5%. The company paid annual dividends of 59.5 Billion Rupiah (US$5.26 Million) in 2011, 99.9 Billion Rupiah (US$8.8 Million) in 2012, and 179.5 Billion Rupiah (US$15.9 Million) in 2013. We see the Company as having excellent balance sheet flexibility.
We like higher yields
This 5-year $385 million US dollar denominated debt of Ottawa Holdings Pte. Ltd., a wholly-owned subsidiary of BHIT, was issued in 05/09/2013 at the coupon rate of 5.875 payable semi-annually. Proceeds of the note were used to fund BHIT's 26.2% stake in MNC land (valued at around US$200 million), initial funding a debt service account, and for general corporate purposes. These senior secured notes are guaranteed by BHIT, the company focused upon in this review.
The default risk is BHIT's ability to perform. Considering the dominate and defensible position of its core media companies, its solid cash flow, historical and recent performance, and its growing diversified business as outlined above, it is our opinion that the default risk for this relatively short-term bond is minimal relative to its very high return potential.
The non-media related businesses in the MNC Group, separately and collectively, have weaker market positions, lower margins and higher associated cash flow volatility which translate into higher business and financial risks. These businesses will also require inorganic growth and investments in order to achieve the scale and market position management targets, which also heighten event and execution risks. However, we see its highly successful core media businesses as providing sufficient cash flow to support its relatively short-term debt obligations.
The Walt Disney Company (NYSE:DIS) and its leading ESPN global cable sports franchise is a major competitor. However, MNC provides more local sports content and is number one in cable sports in Indonesia. Viacom, Inc. (NASDAQ:VIAB), another major competitor that is a global leader in Lifestyle and Entertainment categories, also has fallen behind MNC in these markets in the Indonesian cable market. With local content being much more preferred, MNC's larger competitors may at some time attempt to gain better positioning in the local markets.
The hardest risk for us to identify is the geopolitical risk. Since we find it hard to understand many of the political changes even in our own country, perhaps the uncertainties of changes on a foreign soil become less formidable. With that said, it is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as a adding key economic value to the society it's associated with. Television media communications has evolved into a highly integrated and a basic need for most modern societies, and MNC is highly regarded as one of the best and dominate operators in its homeland.
The economy of Indonesia directly affected advertising market, as well as by the exchange rate of the Indonesian Rupiah. Mitigating a dependence on the local currency, companies such as Procter & Gamble Company (NYSE:PG), Honda Motor Co Ltd (NYSE:HMC), Nestle (OTCPK:NSRGF) and Toyota Motor Corp (NYSE:TM) are among MNC's ongoing clients. With many of its largest advertisers being global heavyweights from abroad, MNC has opportunities to balance its income from many different currencies.
We believe that these MNC bonds have similar risks and maturities to other Yankees bonds such as Bio PAPPEL (OTCPK:CDURQ), Vedanta Resources (OTCPK:VDNRF), or Georgian Railway, which we have reviewed previously on our Bond-Yields.com blog.
Summary and Conclusion
It is our opinion that MNC Investama is positioned well for the future, with the leading and dominant local provider of media content, Media Nusantara Citra, solidly anchoring a highly successful growth strategy in one of the world's fastest growing economies, Indonesia. It has a fair cash position, excellent earnings, reasonable interest expense coverage, and a sound balance sheet. As a result, we believe these BHIT backed bonds offer an extremely high yield relative to the financial risks that we can identify, and have marked them for addition to our Fixed-Income1.com and Fixed-Income2.com portfolios.
Issuer: Ottawa Holdings Pte. Ltd/PT Bhakti Investama Tbk
Yield to Maturity: ~12%
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
Disclosure: Durig Capital and certain clients may have positions in MNC 2018 bonds. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.