- We upgrade Media Chinese International (MCIL) to a BUY, with a higher fair value of RM1.45/share vs. RM1.18/share previously, based on a 5% discount to our revised DCF value of RM1.52/share. We have rolled forward our valuation year to FY14F.

- We raise FY14F and FY15F earnings by 6-7% on the back of:- i) higher adex growth assumption of 5% vs. 3% previously, and ii) lower newsprint price of US$660/MT vs. US$700/MT previously.

- We understand that adex was rather slow in 4Q FY13F (+13% YoY, -33% QoQ) as the first quarter is seasonally slower and further exacerbated by the uncertainty over the impending general election.

- We expect to see a recovery in adex in the second half of CY13 post the general election.

- We expect Hong Kong operations to remain subdued due to the tightening policy on the property market. The new bird flu outbreak may potentially have an impact on adex as well.

- However, management indicates that there are new projects in the pipeline, one being Ming Pao HK recently winning a contract to provide e-textbooks to schools. The project is targeted to be rolled out in 2 years. As of 9MFY13, the Hong Kong and Mainland China segment contributed 18% to the group’s turnover and 17% to PBT.

- We believe media players will continue to stock up on newsprint to take advantage of the comparatively low prices. This follows recent reports that European producers are allegedly destocking newsprint in the Malaysian market which has led to a decline in prices. Investigation by the local authorities into this matter is still ongoing. However, we do not believe this will be resolved in the near term.

- Interest cost from the RM500mil borrowings undertaken to partly fund the 41 sen/share special dividend declared in the previous quarter will have a full-year impact on earnings in FY14F.

- We maintain our capex assumption of RM30mil. MCIL has a dividend policy of 30-60%, with a historical payout ratio of at least 50%. We therefore expect a dividend of 6.5 sen/share for FY14F, for a yield of 5.4%.

- At the current level, the stock is trading at 10x PE of FY14F earnings, trailing Star Publications’ 12x.

Source: AmeSecurities