This week, we revisit a recommendation we made earlier this year for MNC Investama (BHIT) Yankee bonds. Since our last review, this company has continued to dominate in its primary revenue generating industries of media and television in Indonesia. For the nine months ending September 30, 2014, net income attributable to the owners of the company increased by an astounding 722% as compared to the same time period in 2013. BHIT subsidiary, MNC SkyVison (satellite pay television) increased its subscriber base by 17.7% for 9M2014 over 9M2013 and has a commanding 75% market share. In the third quarter, BHIT subsidiary Media Nusantara Chitra, launched the fourth national television station, providing additional value to its integrated media business. Also, BHIT continues to diversify beyond its current holdings in media, television, finance, real estate and natural resources. It recently purchased controlling interest in an Indonesian bank, and is currently building out a fiber optic network in seven of Indonesia’s largest cities.
With 42 months left to maturity, these relatively short-term bonds offer an excellent yield that may exceed 9½% and provides a welcomed opportunity for diversification in the largest economy in Southeast Asia. Because of its commanding position in its primary field of media / television, we think these bonds merit an overweight position within our FX1 and FX2 portfolios.
US dollar denominated bonds in Indonesia
Indonesia is the largest economy in South East Asia. The country has had steady growth in the last few years mostly due to high domestic consumption and growth in exports of manufactured products and commodities. Its GDP expanded 5.01% in the third quarter of 2014, over Q3 2013. Debt as a percentage of GDP in 2013 was 26.11%, well below the United States public debt of 101.53% for 2013.Currently, the United States has a credit rating of AA+. Indonesia with higher growth and less debt has a credit rating of BB+ making it difficult for even a financially strong Indonesian company to receive a rating above the BB+ level.
About the Issuer
PT Bhakti Investama Tbk (BHIT) was established in Surabaya in November of 1989 and moved its headquarters to Jakarta in February 1990. It is focused primarily on capital market-related activities. The Company is publicly traded on the Indonesian Stock Exchange. Its diverse portfolio of companies span many industries including media, financial services, energy and natural resources as well as portfolio investments. BHIT is also the majority owner of the largest, highest rated media company in Indonesia, PT Media Nusantara Citra Tbk (MNCN). MNCN has consistently been the number one ranking television company since its inception, currently capturing a whopping 30% of the free television 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 MNCN and SkyVision are 66.33%% and 78.13%, respectively.
A majority of BHIT’s revenue comes from its media operations, including advertising based media, subscribers based media and online media. For the nine months ended September 30, 2014, media revenue accounted for 81.6% of BHIT’s total revenue. Indonesia’s landmass is an archipelago consisting of over 17,000 islands; consequently, television is the most effective and efficient media platform to promote products and services on a national scale.
PT Media Nusantara Citra Tbk( MNCN) has grown due to its focus on creating local Indonesian content, while most of its competitors provide canned international content. Using this strategy, MNCN has dramatically expanded its network, both internally 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 a complete advertising and marketing solution that is capable of effectively reaching the widest markets in a cost efficient manner. For the nine months ended September 30, 2014, advertising based revenues from MNCN increased 7.5% over the same time period for 2013. This growth is due in part to new shows produced by MNCN like Rising Star (Indonesia’s version of American Idol), as well as sports events broadcasting, and original long-running drama series. Also, in October 2014, MNCN began airing content on SINDO TV, Indonesia’s fourth national television station. This channel will focus on information related content such as news, sports and infotainment. As the market leading media business, MNCN provides stable cash flows and a stream of cash dividends, which ultimately support the debt servicing capabilities of BHIT. As a result, the current operating performance and credit profile of MNCN provides an anchor for BHIT’s credit worthiness.
BHIT’s MNC SkyVision subsidiary increased its active subscribers for the nine months ended 9/30/14 to 2.5 million from 2.1 million for the same time period 2013. This represents an outstanding 17.7% increase in total subscribers. Revenue for the first nine months of 2014 also increased by 9.3% over the first nine months 2013. MNC SkyVision also added three new exclusive channels during Q3 2014 – a children’s channel (ZooMoo), HITS, (a channel containing famous television series such as “Golden Girls” and “Moonlighting”), and a health and beauty channel. Most impressively, MNC SkyVision has a staggering and dominant 75% market share for pay-TV in Indonesia.
Also in Q3, PT Global MediaCom (BMTR) embarked on an exciting new project with the roll out of its fiber optic network under the brand Play Media. The current roll out covers seven major cities in Indonesia. The company is targeting a 35% penetration rate, partly by bundling its services with MNC Sky Visions 600,000+ subscribes in greater Jakarta.
In addition to its ownership in media, financial services, energy and resources, BHIT added banking to its list of businesses earlier this year. In the second quarter of 2014, BHIT, through its subsidiary PT MNC Kapital Indonesia Tbk (BCAP), acquired 25% ownership in PT Bank ICB Bumiputera Tbk (BABP). In October, the Indonesian Financial Services Authority approved BCAP as the controlling shareholder and authorized to change the name of the bank to PT Bank MNC International, branded as MNC Bank.
This five year, $385M, 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 $200 million), initially funding a debt service account, and for general corporate purposes. These senior secured notes are guaranteed by BHIT, the company presented in this review.
BHIT has shown continued growth in all sectors of its operations. For the nine months ended 9/30/2014, PT Media Nusantara Citra increased revenues by 7.5% over 9M2013, PT MNC SkyVision increased revenues by 9.3%, the Online based media sector increased revenues by 77%, MNC Financial Services had a revenue increase of 34.8%. Total assets managed by MNC Finance YTD 9/30/2014 increased 27.3%, and MNC Life and Insurance increased premiums by 22.3% compared to 9M2013.
The company has continued to strengthen its balance sheet with cash on hand increasing from 9/30/13 to 9/30/14 – from USD $160,842,559 to USD $385,554,413, an increase of 139%. Its total bond-related debt as of 9/30/14 is $448.4 M USD (5.471 trillion Rupiah).
BHIT’s interest coverage ratio for the nine months ending September 30, 2014 was 2.73. This represents a slight improvement from the same time period in 2013, at which time BHIT interest coverage ratio was 2.28.
The default risk is BHIT’s ability to perform. Considering the continued, steady growth of the company’s media and financial sectors, as well as its diversified businesses, it is our opinion that the default risk for this Yankee bond is minimal relative to its very high return potential.
The hardest risk to identify is geopolitical risk. In October, a new president was sworn in in Indonesia. Joko Widodo has pledged to make positive changes for Indonesia such as reducing fuel subsidies, investing in much needed infrastructure and to help develop Indonesia’s industrial and manufacturing sectors. Although the Indonesian economy’s growth has slowed a bit this year from years past, it is still projected to grow by approximately 5% for 2014. 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 dominant operators in its homeland.
There is also currency risk present in the exchange rate between the US dollar and the Indonesian Rupiah. However, considering some of MNC’s ongoing clients are large multinational companies such as Proctor & Gamble, Honda Motor Company, Toyota Motor Corporation, and Nestle, MNC has ample opportunities to balance its income from many different currencies.
Summary and Conclusion
MNC Investama continues its growth and dominance in the Indonesian media and television industries. Its diversification into other broad and diverse industries also provides the company with additional growth opportunities. The company has experienced growth in every sector of its business in 2014 and with its new investments in the banking and fiber optic networks, as well as continued investments in proprietary content and online media, we feel the company is well-positioned for excellent growth in the future. As a result, we believe these BHIT backed bonds offer an extremely high yield and short 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: ~9.5%
Disclosure: Durig Capital and certain clients may have positions in MNC 2018 bonds.
Durig Capital Fixed Income Bond Review:
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.
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