- We downgrade Media Prima (MPR) to a HOLD, with a lower fair value of RM2.60/share (vs. RM2.95/share previously), based on a DCF valuation, on the back of a more cautious sentiment.

- We have cut FY14-16F earnings by 8%-9%, following lower adex growth assumptions at 2%-4% (vs. 4%-5%) for the TV segment and 1%-3% (vs. 3%-4%) for the print segment.

- In a recent company visit, MPR management has expressed renewed concerns over the soft sentiment that has weighed down the sector since the announcement of the introduction of GST and subsidy rationalisation scheme. The flight MH370 incident exacerbated the matter and caused a further slowdown in April and May, as many events/promotions were put on hold.

- Furthermore, the expectation of the next round of fuel subsidy reduction around the corner is expected to further depress consumer sentiment in the second half of this year.

- Management notes that the expected adex contributions from the major sporting events this year will not likely make a up for the weak sentiment. Overall, we do not expect significant growth in MPR’s advertising revenue in FY14 due to a higher base in the previous year stemming from General Election campaign expenditures.

- As a guide, MPR’s adex revenue contracted by 2% YoY in 1QFY14, despite an increase in its gross TV adex of 8%, and print adex of 28% (as reported by Nielsen), which suggests a larger discounting. Year-to- May gross adex growth for both the segments had since weakened to 5% and 24%, respectively.

- On the flip side, MPR reaffirms its focus on diversifying its revenue stream towards non-adex. It will continue to invest in platform agnostic content, to be packaged together with its 70,000 hours worth of existing ones and sold to external operators. Positively, MPR has started selling its content to overseas clients. We understand that content sales are expected to contribute ~RM10mil to earnings by FY16.

- The digital segment is expected to break even by FY15, on the back of improving bandwidth cost and the strong subscriber base for its Tonton website.

- Overall, while we are positive on MPR’s longer term fundamentals, we believe near term earnings could disappoint the market.

- Nonetheless, we expect the dividend payout of 60%-80% (translating into an attractive yield of 5%-6%) to provide support to the share price, given its strong free cash flow and net cash position of RM120mil as at FY13.

Source: AmeSecurities