We met Media Prima recently to get updates on the Group’s performance and near term outlook. In the short-term, we expect a pick-up in adex driven by election spends (April-May), 2018 FIFA World Cup (June-July), improvement in adex sentiment post-GE and increase in consumer spending due to the abolishment of GST. Readership and viewership are also expected to improve with the promise of media freedom by the new government, more balanced reporting and the increasing news flow in the country. With the abovementioned short-term catalysts and the growth drivers from digital and commerce revenue, we tweaked our estimates to a marginal loss in FY18F and expect the Group to turnaround with a small profit in FY19F. Our P/BV-based TP is raised to RM0.42 (from RM0.31). We think that the share price weakness has already reflected the underperformance. We upgrade the stock to Neutral from Underperform. That said, in the long-term we remain cautious on the challenging adex outlook given the structural shift in media consumption.

• Digital and commerce as key revenue growth driver. To recap, Media Prima has narrowed its loss by 43.3% in the recent quarter. Quarterly revenue increased for the first time in 1QFY18 (+3.1% YoY) since 3QFY13 as the digital and commerce revenue growth has outpaced the drop in TV revenue. The decline in print revenue also narrowed to only 0.6% YoY as compared to previous quarters’ double-digit contraction. Digital revenue grew to RM9.6m from RM0.4m in 1Q19, with net profit growing to RM3.4m from RM0.2m, mainly contributed by Rev Asia which was acquired by the Group last year. In addition, Rev Asia is also assisting with digital-related business within the Group such as print digital to improve the business. On the other hand, home shopping also delivered encouraging revenue growth of 58.8% YoY with net loss narrowing by 61.2% YoY in 1Q18. Media Prima aims to breakeven in its home shopping business in FY19F. Moving forward, we believe that the new revenue streams from digital and commerce will be the growth driver for the Group, offsetting the decline in traditional businesses, though earnings contributions are relatively small.

• Short-term catalysts. In the near term, catalysts to the sector include i) pick up in adex driven by election spends, 2018 FIFA World Cup, improvement in adex sentiment post-GE and potential increase in consumer spending due to the abolishment of GST, and ii) increase in readership and viewership due to the promise of media freedom by the new government, more balanced reporting and the increasing news flow in the country. Evidently, most of the media companies including Media Prima have seen a pick-up in readership and viewership post-GE. Media Prima’s TV adex (TV3, NTV7, 8TV and TV9) has increased by 10.6% YoY in April which we believe was mainly driven by GE14, though cumulative 4 months was still a drop of 4.9%. Overall, total adex was flat YoY in April 2018, the month before May 9 GE14. The significant adex growth in FTA TV, radio and cinema was offset by the decline in newspaper, magazine and in-store media adex. That said, in the long term we remain cautious on the structural shift in media consumption.

• On-going cost rationalisation. Most media companies with traditional businesses are experiencing tough times. Similar to its peers, Media Prima is in the midst of optimising its operations. The Group has reaped cost savings in 1Q18 from a series of restructuring exercises carried out last year. We expect more cost rationalisation (such as closure/disposal of inefficient operations/assets) and also more cost savings ahead (as the group has made a provision of manpower rationalisation amounting to RM58.5m in FY17 in addition to the Early Retirement Scheme one-off cost of RM52.3m).

• Potential disposal gains. The Group has been looking for the right buyer to dispose of its properties, especially the one in Senai, Johor (NBV: RM19.4m) and Ajil, Terengganu (NBV: RM3.1m), which could potentially result in a one-off sizeable disposal gains.

• Worst case scenario – the Group’s estimated net tangible assets (NTA) still stands at RM0.38/share for FY19F. We believe the Group’s intangible assets such as TV programme rights still have value, adding on to this worst-case valuation.

Source: PublicInvest Research - 12 Jun 2018