-  We maintain our BUY recommendation on Media Chinese International (MCIL) with a lower fair value of RM1.28/share (from RM1.45/share previously), based on our DCF valuation.

-  We trimmed FY14F-FY16F earnings by 7%-10% to reflect our lower adex assumption for MCIL from 5% to 3%, as we think the recovery in adex after the general election will be slower than previously anticipated.

-  MCIL reported a 1Q net profit of RM42.1mil (-13% YoY), accounting for 21% of our previous estimate and 23% of consensus’.

-  The weaker profit is largely due to an increase in finance cost (RM6.9mil vs. RM80k in the same quarter last year) that was undertaken to partly finance the special dividend paid last year.

-  The 2.6% top line growth was mainly due to an increase in adex revenue for its Malaysian business, contributed mainly by election-related advertisements. The travel segment also saw an improvement with a rise of 6.1% in revenue, as its Europe and long-haul tour packages continue to be popular among customers in Asia.

-  However, revenue from its other segments saw a decline, due to the downturn in the Hong Kong property market, China’s policy in clamping down on “extravagant spending” and North America’s slow economic conditions.

-  We believe that a continued weakness in RM against the USD will likely raise its newsprint costs as it restocks, as newsprint accounts for approximately 30% of total cost. We estimate that every 10 cents increase in the exchange rate will reduce its earnings by ~2%. MCIL holds around 6-8 months of newsprint inventory.

-  Going forward, we believe that adex for Chinese newspapers will continue to outperform the overall newspaper industry adex. MCIL is the main benefactor due to its strong market share of over 85% in the Chineselanguage papers segment. As at July, YTD adex for Chinese newspapers grew by 5.6%, while English papers declined by 0.5% and BM papers declined by 1.1%.

-  The group did not declare any dividends this quarter. At the current level, MCIL trades at a forward PE of 9x FY14F earnings. Our DPS assumption of 6.1 sen/share implies a dividend yield of 6%.

Source: AmeSecurities