MEDIA’s 9M16 core PATAMI of RM40m (-62% YoY) came in way below expectations due to lower-than-expected advertising revenue and newspaper sales as well as higher OPEX. Post results review, we slashed our FY16E/FY17E core PATAMI by 42%/24%, after lowering advertising revenue with thinner margin assumptions on the back of higher overhead costs. In view of the challenging adex outlook coupled with a less compelling dividend yield (vs. industry peers of c.6%), we downgrade the stock to UNDERPERFORM with a lower target price of RM0.90 (vs. RM1.35 previously) based on targeted FY17E PER of 10.7x (representing an unchanged targeted -1.0x SD below the 5-year mean).

Below expectation. 9M16 core PATAMI of RM40.4m (-62% YoY) came in way below expectations at 37.6% of our, and 36.4% of the street, full-year estimates. Key negative variances on our end were mainly due to lower- than-expected advertising revenue from both TV and print as well as higher-than-expected overhead cost. On the reported basis, the group recorded LATAMI of RM64.2m in 9M16 after incurring one-off restructuring expenses of RM105m from the print segment (which comprised of: (i) RM76m impairment of property, plant and equipment, (ii) RM27m provision for termination benefits and other closure costs, and (iii) RM1.5m allowance and write-off of inventories). The rationale of the restructuring is to optimise the group’s printing plant capacity to unlock potential cost savings.

Dividend of 2.0 sen was announced, bringing the YTD total DPS to 4.0 sen (9M15: 5.0 sen). For the full financial year, we have lowered our targeted DPS for MEDIA to 6.5 sen (vs. 7.0 sen previously), translating into a yield of 5.4%.

YoY, 9M16 net revenue came in lower at RM970m (-9%), no thanks to the lower advertising revenue and newspaper sales, but partially cushioned by its new home shopping business contribution (c.RM40m). Its print segment revenue, meanwhile, dived by 21% to RM327m with LAT (excluding a one- off RM105m restructuring costs) of RM21m. Its EBITDA plunged by 43%, in tandem with lower revenue recorded and start-up costs as well as higher OPEX from its home shopping business. QoQ, revenue weakened by 9% due to lower contributions from TV and print segments. If the one-off restructuring expenses were excluded, the group would have posted a LATAMI of RM4.8m.

Challenging outlook. The adex sentiment is expected to remain cautious, in view of the current economic condition and rising cost of living. 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 set to continue growing its new media initiatives as part of its long-term strategy to shift into the digital space, in line with industry trends. On the Home shopping business front, the group earlier guided to achieve more than RM150m turnover in 2017 and break even a year later. We, however, remain cautious and merely expecting the segment to record c.RM95m turnover in FY17.

Battle remains over transmission fees. Press has earlier reported that MYTV Broadcasting S/B has agreed to lower its fees for digital terrestrial television (DTT), following complaints from FTA players. The annual fee of each SD channel is proposed to be reduced to ‘a high range of seven figures (vs. RM12m previously) while HD channels fee will be based on programmes required bandwidth rather than the RM25m proposed earlier. The latest proposed fees, however, has yet to coincide with MEDIA as the group is still in talks to negotiate the rates. Thus, should the group manage to negotiate the fee further and close to its current annual rate (c.RM40m), it could provide a positive catalyst to MEDIA, in our view.

Source: Kenanga Research - 30 Nov 2016