We visited the company recently. MEDIAC’s domestic operating environment is expected to remain challenging in the coming quarters due to seasonal factor and cloudy adex sentiment which is weighed down by the on-going subsidy rationalisation measures. Management believes its adex revenue growth is likely to be muted at best in CY14 due to the challenging outlook. Having said that, the newly setup printing plant in Sabah could potentially provide additional revenue stream going forward. The newsprint price, meanwhile, is expected to hover at the current level (at c.USD580/MT range) over the next few months, which could provide some earnings cushion. There is no change in our FY14-FY15 earning's forecasts post the company visit. We reiterated our MARKET PERFORM call on MEDIAC with an unchanged target price of RM0.94, based on a targeted FY15 PER of 10.0x (+0.5x SD).

Adex outlook remains cloudy. The on-going subsidy rationalisation plan has continued to weigh on consumer sentiment and led advertisers to adopt a cautious mode, especially in the Chinese newspaper segment. The cloudy adex sentiment, meanwhile, turned cautious in March after the MH370 tragedy which led several China’s tourist groups to reschedule their holiday plans (to Malaysia) and thus, affecting the local advertisers' appetite in the Chinese's newspapers. According to Nielsen, MEDIAC’s gross adex has declined 4.6% YoY to RM216m in 1QCY14. Nevertheless, management believes the spillover effect of the tragedy will be short-lived; in fact; the adex momentum has started to resume in April. Having said that, management believes its adex revenue growth will likely be muted at best in CY14 due to the challenging adex outlook.

Hong Kong and tour segment updates. Advertising spending in Hong Kong reached a record-high of HKD43.1b (+9% YoY) in 2013, with campaigns roaring back to steady growth in 2H13 mainly underpinned by the banking and investment services. Management expects the positive adex momentum to continue in CY14 in view of the improved property market outlook which could spur developers’ appetite. Meanwhile, despite the recent dispute in Ming Pao’s leadership, MEDIAC does not expect any negative impact to its top-line due to the subscription-based business model. Its tour division, however, is expected to face challenges in 1QCY14 due to seasonal factor.

New printing plant in Sabah could provide an additional revenue stream. MEDIAC used to have a small-market presence in Sabah due to high logistic costs (as its transport newspapers from its Sarawak printing plant), and thus leading to higher selling prices. With the recent completion of its new printing plant in Kota Kinabalu, Sabah, MEDIAC is now able to reduce its transportation costs and more importantly, create an additional adex revenue stream. According to Nielsen, MEDIAC’s flagship newspaper, Sin Chew, only accounted for c.28% of the YTD February’s total gross Chinese newspaper adex (~RM203m) in East Malaysia, thus suggesting ample rooms for growth. Circulation-wise, the average daily circulation of MEDIAC’s newspaper in Sabah was merely 524 copies (or 1.3% of the total Chinese newspaper), based on the latest Audit Bureau of Circulation's data for the period of Jan-June 2013 and it is confident of boosting its circulation to 20k copies after the completion of new print plant.

Newsprint price continues to head south and trade at ~USD580/tonne since January 2014, due mainly to the oversupply from China and lower demand from both Europe and India. Going forward, management expects the current newsprint price trend to persist in the next few months, making no hurry in raising its newsprint inventory, which currently stands at c.6-month worth, in the near term. Meanwhile, the review of newsprint anti-dumping policy (from Canada, Indonesia, South Korea, the Philippines and the U.S.) is expected to be concluded by June 2014. Should there is any reduction or termination; management believes this could provide some downward pressures to the domestic newsprint price and thus benefiting the incumbents.\

Source: Kenanga