CyberAgent (4751) – Risk-Reward Remains Attractive

CyberAgent on Jan 26th posted Q1 FY17 OP of ¥6.3bil (-51.1% YoY) on revenue of ¥86.5bil (+16.9% YoY). The decline in OP was due partly to contraction of the Game business’s OP (-26.9% YoY) after the company undertook some aggressive marketing to battle the competitive environment. In addition, ¥5.06bil was invested in AbemaTV in Q1 FY17 as opposed to ¥0.14bil in Q1 FY16; this contributed to the fall in OP. 
Shares in CyberAgent surged over 5% on Feb 23rd following yet another broker upgrade to ‘’Buy’’. Since our Nov 30th, 2016 report “CyberAgent (4751): Backing its Bets by Doubling Up on AbemaTV Investment’’, the stock has risen 14.5%, as the market comes to recognise AbemaTV’s potential as a major player in the mass media market.  

Key Points

• The company’s leading position in the smartphone ad market is not only maintained but strengthened. 
• CyberAgent’s share of the smartphone game market has grown. 
• We do not expect the aggressive marketing budget for the game business to be maintained. With six titles scheduled for launch in Q2, we expect a recovery in the Game business.  
• AbemaTV continues to trend favourably as user engagement improves and download numbers rise. 
• As of Q1 FY17, the company has achieved 23.7% and 18.5% of PSA’s sales and OP estimates, respectively. We think performance over the following quarters will show steady improvement, keeping the company on track to meet our targets – FY17 being a year of transition, leading to expected substantial earnings recovery in FY18.  
• Based on our FY17 OP estimate, EV/OP is 10.9x, a discount of some 19% discount to the Communication Internet sector EV/OP of 13.5x.  
• The stock remains attractive from a risk-reward perspective in our view.