An earnings momentum stock I now favor.

July 1 "02. 20:30 PM, Bangkok Time.

Nation Multimedia is the country second largest daily English Newspaper along with other multimedia businesses.

NATION’s shares softened on June 11 "02, reflecting the company going X-warrants combined with overblown concern over an expected upcoming one time loss provisioning. This stock then took another correction just below 15, when the SET benchmark index dropped sharply near the end of June.

By the way, the warrant terms where one free warrant for every 4 shares held, at a relative high conversion price of 14. There are some other/older warrants outstanding but even if all where exercised this year, earnings per share should still soar well over 150% in my opinion. The aggregate/total earnings per share dilution of all outstanding warrants would be 23%.

The company is considering setting a loss provision (the amount still not identified) against its Bt384m investment in convertible debentures in the 2Quarter of 02. But I believe this is not a surprise and is fully anticipated. This was previously expected to happen at the end of 4Q02, when those debentures expire. It should be noted that my earnings projection does not include this expected loss provisions as this is an extraordinary and non-cash item, in other words a only a one time event which is expected and so discounted by the market.***

The print media was the hardest hit by the long economic crisis over the last five years and now has the biggest rebound potential. Nation should be a primary beneficiary.

The market consensus view remains too conservative on earnings projections that I have seen. I think those will be revised upwards soon. Prospective strong 2 Quarter "02 operating results are in the cards and a possible market earnings upgrade should result when these are reported, in my view. This then should drive the stock price higher.

Reports I read show fast-expanding circulation and advertising receipts for Kom Chad Luek. (a new popular tabloid Thai language newspaper launched last October "01 and now the country’s third best selling newspaper).

Advertising increased rapidly from only about 6-8 pages in 1Q02, to about 10-14 pages in the second half of "02. Average advertising was about 11 pages in May, and the NATION said June was even higher, due to World Cup football fever. Also note that circulation for Kom Chad Luek. has been rising to 700,000, only eight months after its launch. This should be the key punch to much boost NATION’s advertising revenue in 2Q02.

Note also that ad spending has been rising on the back of a solid recovery in the property market in Bangkok. As advertisements for single-detached developments tend to focus much more on the print media.

According to Advertising Association of Thailand (AAT), full-year ad spending is expected to grow by 12-15% this year to Bt60bn. The association revised up its estimate from the previous target of 8-10%. This based on low interest rates, rebound in consumer spending and already strong ad spending numbers in the first five months of this year. Recent increase in expected Thai GNP forecasts to now 4% for year 2002, also supports this view.

Big advertisers like mobile phone companies and the government sector, which spent Bt1.3bn and Bt0.66bn, respectively. TA Orange was the biggest spender with Bt376mn, followed by GSM Advance with Bt316mn and DTAC, according to reputable reports.

Further, this July and August should see very strong ad spending numbers as well with the government planning to launch a large media blitz to promote its Bt300bn savings bonds to the general public.

Additionally gross margins for second Quarter "02 will also be improved by declining newsprint costs (their single biggest cost component) - a 10% decline, from around US$500/tonne in 1Q02 to US$450- 470/tonne in 2Q02. Further, I note the US Dollar keeps weakening against the Thai Baht which now has increased at least 9% in value vs US$, since the beginning of this year.

This firm confirms that it has secured low-cost newsprint sufficient to last through mid 2003. The latest contracts for 1H03 are priced at around US$390/tonne, which is much cheaper than the assumptions made in other earnings model of US500$/tonne for 2003, which I have seen.

EPS (earnings per share) forecast is currently estimated to rise by 270% to Bt2.30 for 2002 and 20 % to Bt2.80 for calendar year 2003. If you assume full exercise of all outstanding warrants, then deduct 23%. But note this company then would have a large infusion of new cash through the warrants conversion to common stock. (Conversion price is at 10 Baht per share for the older warrants and 14 for the new ones).

This gives the Nation a P/E for calendar year 2002 of only 6.4, falling to 5.3 for calendar year 2003. Rather undemanding considering the economic recovery now at hand. We could see a long term earnings growth trend of 15-20%. However note, Nation does not yet pay any dividends, probably due to desire to pay off debt (see below) and a fast growing core business. However the retained loss should be eliminated by this year and so dividends could/should resume next year.

I would think a 12-month price objective for NATION around 24 Baht per share is probable and a so rate this stock a "long term buy" to any diversified Thai value portfolio.

Compare my earnings forecast to a consensus estimated EPS among various brokers: (Yes, I think this assumes 23% dilution from the warrants).

2002e: Bt 1.33 per share.2003e: Bt 1.65 per share.

Tisco (Thai Securities) and Kim Eng also rate this stock a buy but again their EPS estimate is considerably lower then mine, even after adjusting for any warrant dilution. A good 2Q earnings reports announcement next month should start changing this.

With no major capital expenditures expected in the next two years and its plan to repay debt of about Bt500m in 2002 and about Bt200m in 2003, NATION’s gearing is forecast to decline from about 1.6x at end 2001 to 1.3x at end 2002 and fall below 1x in 2003.

Below is how total ad spending by sector came in year-to-date, until end of May "02:

Media 2001 2002 % GrowthTelevision 13,703, 14,833, 8%Radio 2,062, 2,341, 14%Newspapers 3,760, 4,287, 14%Magazines 1,171, 1,310, 12%Cinema 132, 205, 56%Outdoor 572, 655, 15%Transit 204, 249, 22%

When the SET dropped sharply a few days ago I noticed underlying strength in these relatively liquid shares. This is a good sign and so tends to confirm that the stock has underlying upward bias, in my view.

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Very Best Regards to all members,

Paul A. Renaud.