Highlights

• In an announcement to Bursa Malaysia, Media Chinese said that its wholly-owned subsidiary Comwell Investment Ltd has entered into a share transfer agreement with Qingdao West Coast Holdings (Internation) Ltd in relation to the disposal of 73.01% (292.97m) shares in One Media Group Ltd for a cash consideration of HKD498.1m (circa RM258.8m). The disposal allows the purchaser to obtain cont rolling interest in One Media.

• Financial Impact

• In FY2016, One Media contributed only circa 5.1% to MCIL’s revenue. It is facing a challenging environment in Greater China due to the slowdown in economy, cautious sentiment and structural shift in media platform. Advertisers have been decreasing their adex spending leaving media companies with less source of income. Therefore, we believe the disposal will not materially impact MCIL’s future earnings.

• Pros/Cons

• MCIL plans to utilise HKD250m (circa RM130.0 or 50.2%) of the proceeds for the repayment of its borrowings. This will pare its debt down by 27.8% to circa RM323.1m. We view this as a positive development as it will reduce finance cost by 17.9% in FY18.

• HKD225m of the proceeds will be reinvested into the company for working capital and the expansion of its digital media business. We believe this is in line with their continuing effort to bring more focus to digital media segment.

• We believe the group would be able to sustain its dividend payout to investors in the future as it is already in a net cash position (prior to completion of OMG stake disposal).

Risks

• Weak Adex growth;

• High newsprint cost;

• Threat of new players;

• Depreciation of RM vs. US$; and

• Regulatory risk.

Forecasts

• We raise our FY18 earnings slightly by 1.6%, to account for the reduction in finance costs post disposal of OMG stake.

Rating

HOLD

• Although we favour MCIL for its prudent cost management and strong cash generative business, we believe that adex will be unexciting and gloomy mainly caused by the short term macro headwinds and poor consumer sentiments.

• We will only turn positive on this stock if its venture into digital media comes to fruition.

Valuation

• Maintain Hold call with a slightly higher TP of RM0.71 based on the unchanged P/E multiple of 9.5x (1SD below average mean).

Source: Hong Leong Investment Bank Research - 2 Aug 2016