HUM NETWORK
INTRODUCTION:
Hum Network Limited is engaged in the business of electronic media. The Company's broadcasting portfolio consists
of satellite channels, such as HUM TV, HUM Sitaray, HUM Masala and HUM World (including separate beams for
North America, the United Kingdom and the Middle East). The Company also has strategic business units (SBUs) in
films, digital media, as well as print media. It broadcasts various dramas in northern areas of Pakistan, such as Diyar-
e-Dil, Jugnoo and Gul-e-Rana. It other programs include Mohabbat Aag Si, Maan, Mol, Sangat, Abro, Mana ka
Gharana and Muqadas. Its HUM TV is available in parts of the Middle East, North America, Africa, Australia and all of
Asia. Its Masala TV is a food channel mainly catering to South East Asia food recipes and is available in the United
States, Australia and the Middle East. HUM SITARAY broadcasts programs for thrill seekers, the game players, the
kids and the teenagers. Its magazines include Masala Tv Food Mag and Style G.L.A.M.
For a better understanding of the company’s activities, here is the director’s report of annual report 2017.
Do have a go
Please note at the end of the director’s report, the director has emphasized the importance of credit
rating by PACRA. Many companies having credit risks do not disclose this information. Only a strong
company with a strong outlook can have such strong Long term and short term ratings as indicated by
PACRA. (A+ and A1 rating).
Back in 2016, the company registered lower EPS of 0.57 as compared to 0.79 in 2015. This was
largely due to the 1. Higher cost of production and 2. Higher Finance Costs.
The cost of production was largely due to the increase in the cost of outsourced programs and
an increase in salaries and benefits as we can see. As for the finance costs we can have a look at
this.
The company has increased its finance cost in the year 2016 from 23 million to 40 million an
increase of almost 74%. As an investor, every single person has the right to know the reasons for
a company to raise debt and borrowings. It is important for an investor to realize if the company
is taking loans to fulfill its inventory issues, pay its previous debts, any expansion plans or
investments in further entities. In the case of HUM NETWORK, the company borrowed money to
partly invest in its subsidiary. This can be seen by the cash flow from investing activities in
annual report 2016 (an increase in investments of almost 124%).
This can be further confirmed by the notes section of long term investments of the company.
3. Corporate Rate Tax: It is very important for a company to pay its legitimate taxes. A corporate
company by law of their respective countries have to pay corporate tax. HUMNL according to
this year DOES NOT FULFILL its criteria. The stats show it has paid 0.52% as corporate tax while
the applicable tax rate was 30%. Please refer to the annual report 2017 and screenshot of tax as
shown below. The company has mentioned it has filed taxed up till 2016. It is to be noted the
company would have to pay taxes later on in the upcoming time period. This can have an effect
on the EPS of the company in coming years.
4. Interest Coverage: According to the trailing twelve months data, the company is able to enjoy
good interest coverage of 247.2. It shows the operating profits of the company are able to cover
interest expense of the company.
5. Debt to Equity Ratio and Total Debt: Although the company has raised its debt from 4 in 2013 to
383 in trailing twelve months, it is to be noted the debt to equity ratio still stand at a mere 0.11
ratio. This shows the company is utilizing the debts very well. The recent increase in debt taken
by the company could be due to investment is the new grocery business. Nevertheless, the
company still has moderate debt to equity ratio.
6. Current Ratio: the current ratio of the company rests at 3.11 which is stable at the moment. Also
note the current ratio declined from last year due to rising short term borrowings.
7. Cash flow from Operations and Net Change in Cash: The cash flow from operations have been
steadily rising over the years from 420 million in 2013 to 1257 million in TTM. The net change in
cash rests at 489 million in TTM. Also note the company had a negative net change in cash in
previous years due to financing and investing activities.
8. Cumulative Cash flow from Operations VS Cumulative Profit After Tax: This is one of my favorite
indicators of all time. It tells how much easily a company is converting its sales into cash. The
cumulative profit after tax of HUMNL is 4337 against the cumulative cash flow from operations
of 3530. This means the company is having trouble converting its sales into cash. It is to be
noted the company is utilizing its excess cash into other investments which clearly miss this
criteria for the company. I do not see any hurdle for the company for now as the company might
see this criteria fulfilled when excess cash would be generated from other business investments.
VALUATION ANALYSIS
HUMNL is available at a very cheap price from value investing point of view.
1. P/E ratio stands at 7.7 against its peer average of 19.57.
2. P/B ratio is available at 2.57 against 5.75 peer average
3. PEG ratio is attractive at 0.46
4. Graham’s value is at cheap rate of 19.79 which is far lesser than 22.5
5. Earnings yield is at 13% much better attraction than bond rates in Pakistan
6. Price to Sales is also very attractive 1.63 against the peer average of 2.47
7. Divided yield is very attractive at 10.6%. We have yet to see if the company maintains good dividend
payout in future as it has already making a lot of investments in different ventures.
8. EV/EBITDA: This rests at 7.76 which is quite attractive at this moment
From the Valuation point of view, the company is at very attractive level. We have to wait and see how
the company maintains the new venture activities it has invested into, If the company is able to maintain
its cash flows very well, we might see good gain the share price.
INTRINSIC VALUE:
DCF FCF: -1 (This is due to the very low free cash flows in the trailing twelve months period)
DCF EPS: 34.73 (This is largely due to good EPS increase in the last few years)
Projected FCF: 6.48
ROE Valuation: 17.91 (An investor should look keenly at the ROE Valuation of a company. One needs to
check with the DuPont analysis if the company is returning good earnings based on its sales. Ideally the
net profit margin and total asset turnover should increase with decrease in equity multiplier with time.
We have seen in the screenshot below that HUMNL is able to maintain this net profit margin and total
asset turnover well. The Equity Multiplier also had remained somewhat constant due to borrowings and
financing taken by the company. Nevertheless, the company is maintaining ROE well at 35.80% as
compared to peers average of 33.11%.
Earnings Power Value = 6.90
Peter Lynch Value = 20.30
Please Note the intrinsic values are calculated according to the current financial statements available. If
a company has a poor future outlook, it might see its intrinsic value fall significantly in future. All the
Intrinsic Values are attached below. I DO NOT CONSIDER INTRINSIC VALUES AS TARGETS OF THE
COMPANY
MORE RATIOS TO PONDER ON:
1. ALTMAN Z SCORE: The Altman Z score is an indicator to tell if a company is likely to get bankrupt in
future. The Altman Z score of HUMNL is solid 7.46 as of now and is in good range. For a company to be
in safe range, it should have a value above 3.
2. Beneish M Score: The M score is another criterion used to check if a company is manipulating its
financial statements. I have seen a lot of stable companies clearing this score with ease. HUMNL score is
- 2.78 which shows the company is not a manipulator of its financials.
3. Piotroski F score: This is one of my favorite criteria to check a company’s performance with respect to
previous annual report. HUMNL has a PIOTROSKI F SCORE of 6 as of now which comes in average range.
A company having 7 and higher of these tests is considered stable.
4. FREE CASH FLOWS AND CASH PER SHARE
We can see the free cash flows had been fluctuating in the past years. The free cash flows per share,
free cashflow per sale and free cashflow per CFO have similar stories. The Cash to debt ratio also shows
the company have recently struggled to generate more cash. Previously we have seen the company was
unable to convert its profits into cash when we analyzed the cCFO vs cPAT Values in the financial
analysis. IT IS IMPORTANT FOR AN INVESTOR TO UNDERSTAND A COMPANY HAVING EXCESS FREE CASH
FLOWS RATIOS WOULD ALWAYS DO GOOD IN FUTURE AS IT WILL HAVE ENOUGH RESOURCES AND CASH
TO DEAL WITH WORSE SITUATIONS. IN CASE OF HUMNL, the company is using the free cash flows for
further investments. Please note, this is a good thing as the company does not rely on more debts for
Investment and rather it is utilizing its excess cash>
Management Analysis
1. Auditor’s Report: The Auditor’s report is satisfied and according to the rules of the books. The
auditor have not issued any discrepancies in the financials.
2. The company has also provided a sensitivity analysis in the annual report 2017 to suggest how a
price depreciation and interest hike can have an impact on the earnings of the company. Do
have a go.
From the sensitivity analysis, we can see if for example the rupee depreciation is -10%, it would
have changed the earnings before taxation of around 22.5 million. The number of shares
outstanding are 945 million. This can give an effect of 0.024 in EPS. Similar calculations can be
done with GBP and interest rates hikes mentioned.
3. Credit Rating by PACRA: We have already seen great credit rating given to the company by the
PACRA (A+ and A1 for long term and short term)
POSITIVES:
1. The company is available at a bargain with good valuation matrix.
2. The company is able to maintain good sales, gross profit and net profit with very low debt to
equity ratio.
3. The new venture in the grocery business and upcoming of a news channel can bring in new
revenue.
4. Intrinsic Value is 14.22 as compared to 9.35 Share price giving a margin of safety of 52%
5. The company has a very stable financial structure and does not rely much on debts. Their
diversification in different businesses can be fruitful in future. Only time will tell.
NEGATIVES:
1.The company is currently expanding its business in grocery and other ventures and might need
some capital or borrowings in future that can be temporary hurdle for earnings.
2. The revenue model of the company relies mostly on the ads. Although the pkr depreciation
should not directly affect much on the earnings of the company, it might indirectly affect them
as companies offering these ads can witness some tight budget on advertisings and promotions.
It is just a hunch. Nothing can be said surely.
3. It is yet to be seen when the company would finally start operating in the new ventures and
sales and revenues would pour in. Till than we have to wait and see how the stock performs.