Media Chinese Int’l (MEDIAC)’s 1Q18 core PATAMI missed expectations due to lower-than-expected turnover and higher COGS. Absence of dividend, however, was expected. Moving forward, while the group’s adex outlook remains challenging, we do not discount that potential goodies could be on the cards post the completion of OMG disposal in 2HCY17. We slashed our FY18E/19E core PATAMIs by 37%/17% post the earnings model updates. Maintain OUTPERFORM (with potential goodies on the cards) but with lower TP of RM0.60 (vs. RM0.65 previously) after roll-over with targeted FY19 PER of 14.7x (5-year mean).

Missed expectations. 1Q18 core PATAMI of RM10.1m (-25% QoQ; - 53% YoY) came in below our/consensus full-year estimates (at 12%/11%) owing to lower-than-expected revenue (-11%) and GP margin. Note that the group’s 1Q normally made up c.25-33% of the fullyear PATAMI, based on the past three years. As expected, no dividend was declared for the quarter under review.

YoY, 1Q18 revenue slipped 11% to RM317m, no thanks to the weaker lion’s share publishing and printing segment (-19% to RM217m) despite better performance in the travel segment (+31%). The group’s publishing and printing segment continued to be affected by the decline in advertising expenditure as a result of unfavourable business environment as well as the structural shift to digital media. On the other hand, its Tour division saw an improvement of 12% (to RM99.6m) at the top-line underpinned by better demand for tours to destinations in Scandinavia, Eastern Europe, Australia and New Zealand. At the pre-tax level, PBT dropped by a larger quantum of 48% as a result of unfavourable exchange rate as well as lower GP margin. Stripping off the currency impact, 1Q18 turnover would have weakened by 7% while its PBT would have dropped by 43%.

QoQ, turnover improved by 18% driven by the higher revenue from the travel segment. However, core EBIT (before provision for impairment loss of goodwill in 4Q17) dropped by 14% on a lower profit contribution from the publishing and printing segment on persistently high opex.

Cloudy sentiment remains. The country’s adex outlook is expected to remain cautious in view of the subdued consumer spending. Having said that, the group remains hopeful that several adex friendly events (i.e. 14th Malaysian General Election and the 20th anniversary of the establishment of the HKSAR in Hong Kong) could potentially provide some boost to the advertising markets. Besides being focused on its core businesses, the group also intends to accelerate its digital business and broaden its revenue stream through cross-platform advertising. At the same time, MEDIAC will continue its cost optimization efforts and manpower rationalization in order to improve profitability.

Potential goodies post OMG disposal? MEDIAC has completed the conditions precedent agreement (relating to the proposed disposal of 73%-owned Hong Kong-listed One Media Group (OMG) in early March) with an aim to complete the whole disposal by 2HCY017. The group is expecting to record a net disposal gain of c.HKD359m (c.USD46.2m or RM0.12/share). Thus, in view of MEDIAC’s strong balance sheet (net cash of RM157m as of the end 1Q18) coupled with limited required capex ahead, we do not discount that the group may further reward its shareholders.

Slashed FY18E/FY19E PATAMIs by 37%/17% after imputing a lower adex revenue and GP margin assumptions. As such, our MEDIAC TP is reduced to RM0.60 (from RM0.65 previously) after we rolled over the valuation base year to FY19 with targeted PER of 14.7x (based on an unchanged 5-year mean). Key downside risks to our call include: (i) absence of goodies post OMG disposal, (ii) weaker-than-expected adex outlook, and (iii) higher-than-expected OPEX.

Source: Kenanga Research - 30 Aug 2017