MEDIA’s 1H16 PATAMI of RM45m (-28% YoY) came in below expectations due to lower advertising revenue and newspaper sales. Post results review, we lowered our FY16E/FY17E NP by 21.4%/15.4%, after factoring in lower revenue and margin assumptions. In view of the challenging adex outlook coupled with a less compelling dividend yield (vs. industry peers of c.6%), we downgraded the stock to UNDERPERFORM with a lower target price of RM1.35 (vs. RM1.45 previously) based on targeted FY17E PER of 12.2x (representing an unchanged targeted -1.0x SD below the 6-year mean).

Below expectation. MEDIA’s 1H16 PATAMI of RM45.2m (-28% YoY) came in below expectation at 33.1% of our, and 32.6% of the street, full-year estimates. Note that, the 1H results normally made up c.38%-45% of the historical full-year earnings. The weaker-than-expected 1H16 result was mainly due to the decline in newspaper sales & ad revenue from both TV and print, reflecting the vulnerable consumer and advertising spending as well as changes in media consumption habits (where advertisers are prepared to reshuffle adspends to the relatively cheaper media types (i.e. radio, outdoor) vs. TV/newspaper segments in challenging economic environment).

Dividend of 2.0 sen (1H15: 3.0 sen) was announced. For the full financial year, we expect MEDIA to distribute a total dividend of 7.0 sen, translating into a yield of 4.8% with 72% payout ratio (in-line with its dividend payout policy of 60%-80% of PATAMI).

YoY, 1H16 net revenue came in lower at RM654m (-6%), no thanks to the lower advertising revenue and newspaper sales, but partially cushioned by its maiden home shopping business contribution. Net ads revenue contracted by 8% (affected by the soft adex and subdued market sentiment) while circulation revenue deteriorated by 25% in tandem with the declining global circulation trend. The lower turnover has led the group’s PBT deterioration by 38% with margin lowered to 7.8% (vs. 12% a year ago), impacted by the higher overheads cost and start-up costs from its home shopping business.

QoQ, revenue improved by 15% from the seasonally weaker quarter to RM350m partly contributed by the new retail home shopping business, which recorded RM18.6m turnover. PATAMI, meanwhile, soared 62% to RM28m as a result of higher turnover (lower base effect) and better margins.

Outlook. The adex sentiment is expected to remain cautious, in view of the current economic condition and increase in cost of living. We have thus lowered our FY16/FY17E industry full-year gross adex revenue growth to 2.0% YoY each (vs. 4.0%/3.0% YoY previously). Meanwhile, shift in advertisement delivery to digital media, customer fragmentation, and increased competition will continue to pose challenges to the group. Besides defending its core traditional adex business, MEDIA is also set to launch new business initiatives (especially the digital media products & services) to complement the existing business segment. On the Home shopping business front, MEDIA remains hopeful on its outlook and expects to achieve more than RM150m turnover in 2017 and break even a year later.

No solid progress on the DTT transmission cost structure negotiation as both parties are still finding ways to compromise the rate. To recap, MYTV was granted a license by the Government to operate the infrastructure and network facilities for Digital Terrestrial Television (DTT) services for 15 years. Incumbents would have to pay RM12m (per channel) rental fee for broadcasting in standard definition (SD) format and RM25m for high definition (HD) channel as compared to MEDIA’s current annual transmission cost of c.RM40m. MYTV is set to launch its digital services in August 2016 while the targeted total analogue switch-off date for Malaysia is scheduled at end-June 2018.

Source: Kenanga Research - 12 Aug 2016