We attended MEDIAC’s post 4Q14 results briefing last Friday. The key highlights of the meeting were: (i) adex outlook, (ii) e-text book in its Hong Kong division, (iii) newsprint price, (iv) e-paper, and (v) Syariah compliant status. While management reiterated its gloomy view on adex outlook, the group believes the stable newsprint prices could provide some cushions to its earnings. Despite the challenging outlook, management plans to keep its dividend payout policy unchanged at 30%-60% range. Post-briefing, we maintained our FY15-FY16 earnings estimate. We reiterated our MARKET PERFORM call on MEDIAC with an unchanged target price of RM0.92, based on targeted FY15 PER of 9.9x, representing a 5-year average PER.

Adex outlook remains cloudy. The MH 370 incident has dented the local advertising market noticeably as advertisers temporary halted their advertisement spending since early March and only resumed from mid-May. Meanwhile, the on-going subsidy rationalisation plan continued to weigh on consumer sentiment, which led advertisers to adopt a cautious mode, especially in the newspaper segment. On top of that, unlike the 2013 election year, the absence of political advertisement, lesser government spending coupled with a seasonality factor had also caused the group to record lower revenue in 4Q14 (-7.7% QoQ; 11.3% YoY to RM215m). Moving forward, while the adex sentiment should continue to remain cloudy in the following months, management anticipates that the local advertisers’ appetite could potentially increase as we approach the GST implementation date (1 April 2015) as a result of aggressive spending. Nevertheless, MEDIAC believes the adex outlook may turn challenging again in view of economic uncertainties post GST period.

Penetrated into the e-text book segment in Hong Kong. MEDIAC has recently secured a three-year publication license to circulate e-text books as well as to provide an e-education platform to both primary and secondary schools in Hong Kong. While the e-text book segment is still classified as an optional/selective under the current education system in Hong Kong, MEDIAC believes its adoption rate could reach 50% (with c. 20% market share) in coming months and expect the segment to contribute HKD20m-HKD30m revenue (or c. USD2.6m to USD3.9m) per annual with a targeted net profit margin of c.50%. The revenue contribution is expected to be small as it only accounts for c.3.6%-5.4% of MEDIAC’s Hong Kong and Mainland China division turnover in FY14; should the group’s expectation materialised.

Newsprint price is expected to hover at the current level at c.US580/tonne, due mainly to the weakening demand and stable supply. MEDIAC believes the current newsprint price trend could persist in the next few months and is in no hurry in raising its newsprint inventory, which currently stands at c.6-8 month. Meanwhile, the review of newsprint antidumping policy (from Canada, Indonesia, South Korea, the Philippines and the U.S.) is still on-going. Should there is any reduction or termination; management believes this could provide some downward pressures to the domestic newsprint price, thus benefiting the incumbents.

Moving more aggressively in the e-paper segment. MEDIAC is targeting to create more awareness of its e-paper products to mass market in coming months in both the SME and SMI groups. The group has soft-launched the products since 1QCY14 and planned to tie-up with other local media giants to lure more viewerships as well as advertisement revenue going forward.

Expected to resume Syariah-compliant status by November. The group was removed from the Syariah-compliant list since November 2013 due to its failure in achieving the conventional debt/total asset ratio criteria. Management is currently ironing the issue and believe it could resume its Syariah-compliant status in November 2014 review based on its audited FY14 accounts.

Source: Kenanga