Prospects for rebound


With the exception of its recent performance, the scrip of Hum Network Limited has generally mirrored the performance of the Karachi stock exchange. During 3QFY11, the company was unable to raise tariff rates due to advertising budgets being directed towards promotional campaigns in lieu of the ICC cricket world cup. Further concerns regarding its advertisement revenue still persist in this challenging environment and the scrip has generally been sidelined by investors.
Revenue rebound: However, with the summer season in full swing, advertisement campaigns are expected to generate revenue for the company on account of various promotions for summer products in addition to the onset of the wedding season as evidenced by the bridal couture week in Karachi. In addition, the network expects revenues to rebound due to increasing popularity and a higher rating on its television programs on all of its main channels, which will ultimately attract higher advertisements due to increased viewership.
In a report released by PACRA, HUMNL has been assigned a long term-rating of A and a short term rating of A1. The rating agency bases this credit rating on account of HUMNL having a low level of leveraging supported by sound coverage ratios and the repute of the network’s key revenue generating brand, Hum Television. In addition, HUMNL’s current ratio of 1.90x for 3QFY11 is well within the prudential requirement. Currently, its total debt to equity ratio is quite low and stands at 0.32 for 3QFY11. However, further debt acquired will make the credit rating susceptible to a change. According to a report released by BMA Capital, HUMNL’s final installment on its debt financing is due in December 2011 eventually causing the company to be a debt free concern.
Risk surrounding future profits: Further detailed in PACRA’s report is the strain witnessed on the free cash flow from operations which is currently being drained out to fulfill the increasing working capital requirements. The report details that HUMNL faces concentration risk with the majority of advertising revenue currently generated from five companies. Furthermore, a report released by Gallup Pakistan, released during June 2011, indicates that print and television advertisement has declined by 20 per cent YoY since March 2010. Gallup Pakistan also mentions certain leading companies, which currently provide the bulk of revenue for HUMNL such as PTCL, Unilever, and Nestle; have exhibited a drop in advertisements. This could place HUMNL at risk regarding future profitability.
Hum network limited has developed plans to keep the business momentum strong in a highly competitive industry. In order to curb costs, the company suspended the operations of its radio channel (of Rs47 million), which did not fare well in the radio market due to stiff competition and a lack of popularity. In addition, the company carried out production in house to further adhere to stringent cost measures while still competing for its share in the market. The company is focusing on re-evaluating Oye-TV on air as it has failed to gain the expected advertisement due to a lack of viewership and limited space availability on the cable network. Furthermore, the company is keen on expanding its horizons within the USA, Canada and South Africa. HUMNL has indicated that it is considering the implementation of an enterprise resource planning system, which is a positive sign for the future growth and smooth operating conditions of the concern.
Enhancing corporate governance: HUMNL has an experienced management team with the majority of team members possessing experience from the earliest days of television broadcasting within Pakistan including the national television channel, Pakistan Television Network (PTV). A number of executives, some of whom belong to the sponsoring family, serve on the board and are involved in the current operations of the company. This structure is expected to enhance the corporate governance of HUMNL. The network has a diverse range of channels catering to different viewers. Consequently, it prides itself on broadcasting high quality programs which has the set standards for television broadcasting within the entertainment industry in Pakistan.
With a dedicated management team in place and prospects for the business to rebound, the performance of the scrip of HUMNL should be monitored frequently. What remains to be seen is the ongoing effective management of HUMNL’s repayment behaviour and the ability to finance working capital requirements without placing a stress on the free cash flow from operations. If expectations regarding leveraging remain consistent, cost controls are kept intact, and bearing no further decline in the cash position and advertisement revenues, a ‘hold’ on the shares of HUMNL deems at best a fruitful consideration.