Media Prima (MEDIA) posted another disappointing report card for 1Q17 due to (i) lower-than-expected advertising revenue and newspaper sales; (ii) start-up losses for new digital & consumer-based business initiatives and (iii) higher OPEX. Post review, we slashed our FY17/FY18E PATAMI by 52%/22%. The group’s outlook remains challenging in view of the prolonged weak adex outlook. With no immediate catalyst ahead, we maintained our UNDERPERFORM call on MEDIA but with a lower target price of RM0.85 (vs. RM0.94 previously) based on targeted FY18E PER of 12.0x, implied an unchanged -1.0x SD below its 5-year mean.

Another disappointed quarter. 1Q17 LATAMI of RM39m (vs. RM17 PATAMI a year ago) came in way below expectations as the street/house are expecting the group to deliver RM79m/RM88m PATAMI for the full financial year. Key negative variances on our end were mainly due to lower-than-expected advertising revenue from both TV and print segments as well as the persistence high overhead cost. No dividend was declared during the quarter, as expected.

YoY, 1Q17 net revenue came in lower at RM272m (-10%), no thanks to the lower advertising revenue and newspaper sales as traditional media faced ongoing challenges of subdued adex and the shift to digital media. The group’s TV segment contracted by 22% as FTA TV remains pressured by the weak adex sentiment. The segment incurred a LAT of RM23m (vs. PAT of RM5.9m in 1Q16) as a result of the lower revenue coupled with higher operating costs for the digital business initiatives. Its print segment revenue, meanwhile, dived by 25% to RM83m with LAT of RM17m vs. RM0.9m a year ago. EBITDA fell into the negative territory to –RM8.5m (as compared to RM50m in 1Q16) due to lower turnover as well as start-up costs incurred in the group’s new digital and consumer-based business initiatives. QoQ, revenue fell by 15% due to subdued adex sentiment and seasonally factor. Consequently, the group recorded a LBT/LATAMI of RM39.4m/RM38.5m, respectively.

Increase non-ads and digital presence. Management had highlighted earlier that its over dependence on the local TV & print advertising revenue as well as the lack of digital presence were the key downfall to its current media platform. The group set to sail through the challenging wave by focusing on expedite digital transformation as well as widening the non-ads segment contribution. MEDIA is aiming to expand the digital-based revenue to 20% (from 5% currently) as well as widen the non-ads, non-TV & Print segment revenue to 40% (from 20% currently) by year 2020. Besides, the group also aims to expand its reach beyond Malaysia and expect the regional market to contribute 10% of its revenue, up from 2% presently.

Odyssey strategies. Besides defending its core and strengthening operational efficiency, the group is set to focus and cross-sell each medium’s strengths (to become the market leader in broadcast and digital publishing), growth in commerce through integrated media, as well as expanding beyond Malaysia.

Conservative stance remains. While we concur with the management's digital and transformation road path, the evolution of the traditional media could lead the group to experience some gestation period over the short-tomedium term. Besides, in view of the rapid technological change in the evolving Internet industry, the existing portals could lose unique visitors within a short period of time should the group fail to keep pace with technological changes and address customers’ needs.

Trimmed forecast. Post result review, we have slashed our FY17/FY18E PATAMI by 52%/22% to RM43m/RM76m, respectively, after (i) incorporating the weak 1Q17 numbers, (ii) lowering adex revenue assumption; and (iii) raising overhead costs.

Source: Kenanga Research - 30 May 2017