Media Prima (MEDIA) posted another disappointing report card for 1H17, thus prompting us to slash our FY17-18E PATAMI by 94-43%. With no immediate catalyst coupled with potentially more kitchen sinking exercises ahead, we made no changes on our UNDERPERFORM call on MEDIA. Its TP, meanwhile, is lowered to RM0.65 (vs. RM0.85 previously) after changing the valuation metric to P/BV (vs. PER previously) in view of its earnings headroom ahead. Our TP is based on targeted P/BV of 0.56x, implied -2.0xSD below its 5-year mean.

Below expectation. 1H17 core LATAMI of RM29m (vs. RM45m PATAMI a year ago) came in way below expectations as both the street and us are expecting the group to deliver RM42.6m as well as RM43.7m PATAMI for the full financial year. Key negative variances on our end were mainly due to higher-than-expected direct and overhead costs. Absence of dividend was also a surprise to us but considered fair judging from its weak financial performance.

YoY, 1H17 net revenue came in lower at RM601m (-8%), as the improvement in the Home Shopping segment (+220% to RM60m) was not enough to offset the lower advertising revenue as well as newspaper sales (due to the subdued adex and the shift to digital media). The group’s TV segment contracted by 15% as FTA TV remains pressured by the weak adex sentiment. The segment incurred a LAT of RM20m (1H16: RM22m PAT) as a result of the lower revenue coupled with higher operating costs for the digital business initiatives. Its print segment revenue, meanwhile, dived by 20% to RM183m with LAT of RM159m vs. RM0.5m a year ago due to the RM142m impairment cost arising from its indirect associate company - MNI. QoQ, revenue advanced by 21% as core advertising revenue started to gain some momentum. Nevertheless, the group recorded a LATAMI of RM133m after recognizing one-off impairment cost.

Odyssey strategies update. Besides defending its core and strengthening operational efficiency, the group is set to continue 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. While BAU revenue declined by 17% YoY, Odyssey revenue has improved by >100% YoY to RM74m in 1H17 (mainly driven by its Home Shopping business) but still suffering LBITDA of RM24m during the gestation period. Note that, MEDIA is aiming to expand the digital-based revenue to 20% (from 5% currently) as well as widening 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.

Kitchen sinking exercise may be continued. Despite posting a one-off impairment charges in 2Q17, MEDIA believes there are still some kitchen sinking exercises required in FY17. With the Odyssey strategies in place, the group is set to further optimise its costs' structure to align with its digital transformation journey. Management believes there is a need to review its operating and overhead costs to enhance efficiency. Note that, MEDIA has staff strength of 4.15k as of the end FY16, of which 23% are non permanent. We do not discount that the group may implement another early retirement scheme to lighten its overhead costs. Besides, although management is keeping its dividend policy (min. 60%-80% of PATAMI) unchanged for now, the group does not discount a guidance review in coming months to align with its business direction.

Cutting core earnings by 94%/43%. The poor 1H17 performance has led us to slash our FY17-18E core PATAMI by 94-43% after imputing higher direct and overhead costs assumptions. 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 periods over the medium term.

Source: Kenanga Research - 15 Aug 2017