Investment Highlights

• We maintain our HOLD recommendation on Media Chinese International (MCIL) with a lower fair value of RM0.45/share (previously RM0.54/share) after switching from DCF to a PB valuation method, which we believe is more suitable due to uncertainties in future cash flows. Our fair value is pegged to a PB multiple of 0.9x on FY17 BVPS.

• MCIL posted a 1QFY18 core net profit of RM10mil, representing declines of 55% YoY and 47% QoQ (using USD/MYR 4.294 as the translation exchange rate for all quarters under comparison). The quarterly net profit was markedly below expectations, accounting for 12% of our full-year forecast and 11% of consensus’.

• The disappointment in 1QFY18 results was attributed to a fasterthan-expected decline in adex revenue. As such, we are cutting our net profit forecasts for FY18F-FY20F by 49-65%.

• The YoY dip in 1QFY18 net profit mainly stemmed from a 11% decline in turnover amid weak consumer sentiment, soft adex budget and the continuous shift from traditional to digital media. The weakening of MYR and CAD against the USD further exacerbated the group’s bottom line for the quarter. Adjusted for currency impact, the YoY declines in the 1QFY18 revenue and PBT would have been less severe at 7% and 43% respectively.

• On a brighter note, the loss before tax in the Hong Kong, Taiwan and Mainland China segment narrowed from RM5mil in 1QFY16 to RM4mil this quarter in spite of a slight decrease in revenue (- 6% YoY). This was attributed to higher contributions from the segment’s digital (+40% YoY) and educational textbook businesses.

• In addition, PBT of the group’s travel segment appeared encouraging during the quarter, recording YoY growth of 23% on higher demand for tours to destinations in Scandinavia, Eastern Europe, Australia and New Zealand.

• For the coming quarter, management expects slight improvement in the Hong Kong, Taiwan and Mainland China segment, underpinned by events such as the commemoration of the HKSAR's 20th anniversary (in July 2017) and initiatives to be taken by the new government.

• On the proposed disposal of 73% equity interest in One Media Group, none of the conditions precedent to the Share Transfer Agreement had been satisfied or waived by Qingdao West Coast Holdings (purchaser) as of 1 Aug 2017. Management has indicated that it is unlikely that the Share Transfer Agreement can be completed before the Long Stop Date tomorrow.

• We are keeping our HOLD call on MCIL due to: (1) rapid decline in newspaper circulation owing to the availability of digital content; (2) subdued adex outlook against the backdrop of weak consumer sentiment; and (3) growth of digital revenue remains insufficient to cushion declines in traditional print media (ratio of digital to traditional revenue stood at only 0.03 in FY17).

Source: AmInvest Research - 30 Aug 2017