Media Chinese (MCIL) has proposed to spin off its travel business and to separately float this business on the Growth Enterprise Market (GEM) in the Hong Kong stock exchange.   

Unlocking value from travel business. The announcement is a positive surprise. Since the travel business is MCIL's non-core business, we see this as the right time for the group to spin off the division and unlock its value, having turned around the business successfully for the past two years.

Background on MCIL's travel business. MCIL's travel business is operated by its wholly-owned subsidiaries, Charming Hong Kong and Charming North America, both incorporated in Hong Kong in 1987 and 1993 respectively. This business involves the provision of inbound and outbound touring services, sale of travel packages and the provision of travel related services, mainly in Hong Kong and North America. While the travel business registered losses of USD42k in 2010, it has returned to the black as well as registered strong revenue and PBT growth from FY11-12. It chalked up revenue of USD65m in revenue (up 10% y-o-y) and a PBT of USD1.9m in FY11. In FY12, the group's revenue grew 8% to USD70m while PBT surged 30% to USD2.5m. 

Still a major shareholder in new listing entity. The group will hold 75% in the target listing entity while the remaining 25% will be in the hands of the public. We believe the initial public offer would be in the form of issuance of new shares. We also foresee the travel business being listed at a PER range of between 10x and 15x, in line with its would-be peers such as Morning Star, Travel Expert and Phoenix Tour, which are also listed in GEM. Morning Star is currently trading at a PER of 15x, with a market capitalisation of USD43m; Travel Expert's PER is 7x and has a market cap of USD30m, while Phoenix Tours is currently trading at 16x, with a market cap of USD113m.

Scenario analysis: No significant impact. Assuming that this travel business makes USD3.5m in FY13 and ascribing a PER of 10-12x, its potential market cap could range from USD35m to USD42m. This is somewhat insignificant compared with MCIL's current market cap of USD830m (RM2.6bn). Thus we believe that the potential listing may have limited impact on MCIL's share price given that the travel business only contributes 3% of the group's net profit.

Maintain BUY. MCIL's share price has gone up about 14% since it announced a capital repayment on 16 July 2012. Based on yesterday's closing price of RM1.54, the stock is only trading at a 10x PER, if we were to strip off the 41 sen per share capital repayment, for which the ex date has yet to be determined. All in, we are positive with the surprise announcement. Nonetheless, the size of MCIL's travel business is relatively insignificant given that over 90% of the group's earnings come from its core printing business. Maintain BUY for now, with a cum-FV of RM1.86.

Source: OSK