MCIL’s 1QFY18 core net profit of RM10.4m (-53.2% yoy) was below expectations, mainly due to lower-than-expected contribution from the print division. We remain cautious on MCIL primarily due to the continual weakness in its print division with potentially more cautious ad spending in Malaysia and HK/China due to the uncertainties in the market and poor consumer sentiment as well as fierce competition from other tour operators in its travel division. Given the disappointing 1QFY18 results, we cut our FY18-20 EPS forecasts by 21-22%. We maintain our SELL rating on MCIL with a lower TP of RM0.43.

Lower 1QFY18 Revenue Due to Print Segment

Media Chinese International Limited (MCIL) posted lower 1QFY18 revenue and net profit of RM316.8m (-10.9%) and RM10.1m (-53.3% yoy), respectively. The drop in 1QFY18 revenue was mainly due to lower contribution from the print division but partially offset by higher contribution from the travel division. The print division’s 1QFY18 revenue declined by 18.6% yoy to RM217.2m due to persistently weak consumer sentiment, soft advertising spending and the structural shift to digital media, while the travel division’s revenue increased by 12.4% yoy to RM99.6m due to increase in demand for tours to certain destinations like Scandinavia, Eastern Europe, Australia and New Zealand. 1QFY18 EBITDA margin was also weaker at 6.7% as compared to 10.9% in 1QFY17, mainly attributable to lower contribution from the print division.

1QFY18 Core Net Profit Down 53.2% to RM10.4m, Below Expectations

After adjusting for one-off items, MCIL’s 1QFY18 core net profit dropped 53.2% yoy to RM10.4m. This came in below expectations, accounting for 10.5% and 11.5% of our previous and consensus FY18 forecasts, respectively. The variance was mainly due to lower-than-expected contribution from the print division, in particular lower adex contribution.

Maintain SELL With a Lower TP of RM0.43

We cut our FY18-20E core EPS forecasts by 21-22% to take into account the weak 1QFY18 results. We remain cautious on MCIL largely due to: 1) weakness in its core print division; 2) potentially cautious ad spending in Malaysia given the weak consumer sentiment; 3) potential ad spending slowdown in the HK/China market as advertisers cut their ad budgets in view of the slow property market as well as the still-soft consumer sentiment in the luxury products sector; 4) negative effects on hard copy circulation due to the continual shift in reader preferences to reading on mobile devices or over the Internet; and 5) fierce competition from other travel operators. In tandem with our earnings downgrade, our 12-month target price on MCIL has been cut to RM0.43, based on 9x PER (updated 1SD below 5-year average; previously 8x) on our 2018E EPS. Thus, we are keeping our SELL call on the stock.

Key Upside Risks

The potential upside risks to our call include: 1) a sharp rebound in the print division; 2) a surge in HK/China adex due to a turnaround in sentiment; 3) a substantial increase in hard copy newspaper circulation; and 4) a substantial increment from its travel business.

Source: Affin Hwang Research - 30 Aug 2017