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ANALYSIS DONE BY AMMAR YASEEN

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.

CEO’s Statement in Annual Report 2017:


Throughout our journey we have emphasized on being stronger from within
to deliver on our growth aspirations and to provide our audience with an
ultimate media consumption experience through our creative and distinct
content. Which in turn gives us a sustainable competitive advantage, and this
year was no exception. We delivered another year of continued growth in our
network’s business. In addition, we made clear progress on strategic priorities
that helped in boosting our existing strengths and allow us to prosper in an era of
expanding consumer choice. In the previous year we made targeted investments
in the content, brands and markets that provide significant growth opportunities for
the future.
2017 was a productive year for HNL which saw increasing revenues
and profits. Our underlying operational profitability improved,
driven by sales growth. Net revenues for the year have increased
by 17.8% and profitability by 89% in the FY 2017.
Looking ahead, we are entering an era in which conventional
wisdom will be increasingly challenged and therefore we
must focus on helping solve social and environmental issues
to play a relevant role in society. Hence in order to achieve
this purpose, the management is bringing out HUM News
channel in which journalistic values will be the priority.
The channel aims to present a better and positive image
of Pakistan.
In addition to this, the arrangement with M.D.
Productions (Private) Limited to acquire the
majority of its shares is now with the Court for
its approval and completion of related
formalities. This vertical diversification
would enable HNL to achieve its long
term objectives of growth and
expansion in the Pakistani media
industry, and the same is expected to
lead to greater profitability in coming
days.
I express my gratitude to the Board of
Directors of the Company for sharing their
experiences and aiding new ideas for the
betterment of the Company. Further, I wish to
thank the Company’s customers, vendors and investors for
their continued support. Last but not the least; I appreciate
the dedication and contribution made by employees at all
levels who through their competence and hard work have
enabled the Company to achieve good performance.
I have added the CEO remarks in the start of the analysis to let investor’s know the significance of the
company’s words through the mouth of its CEO. Immediately after the contents, one can realize the
activities of the company by the mere words of its CEO. The company is deliberately trying to diversify its
business in media by coming up with a news channel. Some matters pending in the court would resolve
shortly as indicated by the CEO.
The company also has recently decided to enter into the grocery business as a wholly owned subsidiary
with title HUM MART. Their recent announcement is attached below.

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).

INTERESTING LOOK AT THE HOLDINGS:

Do have a glimpse at this shareholders of the company.


The international famous hedge funds are in the main shareholders of the company. Its impressive to
see foreign companies taking interest in this company. Moreover, in the recent announcement, HUMNL
announced the KINGSWAY FUND purchased more shares as well. It is evident from the action, a foreign
company would invest more in a company. I wonder what that reason might be?
FINANCIAL ANALYSIS
1. Sale Growth: The company is able to perform well with revenue growth of CAGR (compound
annual growth rate) of 18.29% without a single declining year. It has also kept a good consistent
sale growth of above 10% each year.
2. Gross, Operating and Net Profit: The company has done extremely well maintaining good gross,
operating and net profit. An investor can see the company is able to maintain gross profit
margin of above 40%. Its current gross margin is better than industrial peers average of 38.71%.
The operating income has also been consistent with increase from 568 in 2013 to 1236 in
trailing twelve months. This is an impressive CAGR of 16.82%. The operating profit have been
consistent as well in 18-25% range. However, do note the company had a operating income of
772 in 2016 as compared to 1059 in 2015.The net profit of the company has increased with an
amazing CAGR of almost 24.4% in last 5 years. The company is able to grow its net profit margin
from 16.5% in 2012 to 21.31% in trailing twelve months. Please NOTE, the company has
decreased its net profit from 733 in 2015 to 487 in 2016. Before moving forward, we should
analyze what was the company up to during year 2015-2016. Have a look at Profit and Loss
Statement of the company of annual report 2016.

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

INTRINSIC VALUE = 14.22


Current Price = 9.35
Margin of Safety = 52% undervalued

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.

ANALYSIS BY AMMAR YASEEN


DISCLAIMER: IT IS VERY IMPORTANT TO KNOW ABOUT YOUR STOCK AND THE COMPANY YOU
ARE INVESTING IN. ALL THE INFORMATION IS PROVIDED FOR INFORMATION PURPOSE ONLY.
THE INFORMATION HAS BEEN OBTAINED FROM THE SOURCES BELIEVED TO BE RELIABLE.
ANALYSIS PROVIDED IS OPINION ONLY. THIS IS NOT A BUY CALL OR SELL CALL. YOU ARE SOLELY
RESPONSIBLE FOR ALL TYPES OF INVESTMENT AND TRADING DECISIONS MADE BY YOU

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