CyberAgent (4751) – FY19 Earnings Turning Point

CyberAgent’s (CA) share price has fallen over 14% since peaking at ¥4,075 on May 30th, 2017, in the wake of criticism by analysts regarding progress made with monetising the Internet TV station service, AbemaTV. The July 27th earnings release, when the company reported lower than expected profits due to the weak performance of the Game Business, made matters worse. Since our upbeat November 30th, 2016 report, “CyberAgent (4751): Backing its Bets by Doubling Up on AbemaTV Investment”, the stock has performed well, rising 46% to the May 30th high, before falling back due to factors mentioned above. In addition, valuations have become unappealing; EV/OPe on our FY17 OP forecast is 14x. We still like the company and have confidence in its strong market positioning in the smartphone advertising and game businesses, as well as in the potential of AbemaTV. However, we think that more investment will likely be needed to help AbemaTV reach wide popularity and to push it closer to the monetisation stage. Therefore, the resources required to achieve these goals will weigh on earnings in FY17 and FY18 and likely dampen interest in the shares until the signs of improvement at the bottom line are evident.  

Key Points

• The Internet Ad Business will likely continue to be the top-line growth driver over the forecast period, FY17-FY19, and will enjoy superior margins. 
• The Game Business’s growth rate will likely continue to exceed the industry average. However, OPM may decline to around 20% in FY19, due to higher development costs and marketing expenses. 
• Key performance indicators support our belief that AbemaTV will succeed. 
• Nevertheless, we expect FY18 to be a tough year for CA as it steps up its investment on AbemaTV to help it achieve “mass media” status in FY19. 
• Although we are eyeing double-digit revenue growth rates in each of the coming three years, OPM is likely to deteriorate in FY17 and FY18, before then exceeding 12% in FY19 as the Internet TV station service comes close to breakeven, while the other businesses continue to contribute positively.
• With the share price having done well since our upbeat report last November, valuations are less attractive; EV/OPe on our FY17 OP estimate is 14x.