Both Media Chinese Int’l (MEDIAC) and QWCH have announced the lapse of the share transfer agreement last week. The disappointing announcement has removed the key catalyst for the stock. We have lowered our FY18/FY19E core PATAMI by 1%/2% after re-incorporating OMG contribution. With continued challenging adex outlook ahead coupled with the lack of key earnings catalyst, we cut our MEDIAC target price to RM0.47 after pegging to a lower targeted FY19E PER of 11.7x (vs. 14.7x previously). Downgraded the stock rating to MARKET PERFORM.

Offer period of One Media Group (OMG) lapsed. MEDIAC has announced that the share transfer agreement in relation to the disposal of 73.01%-owned Hong Kong-listed OMG has lapsed on 31 August 2017 as both parties (MEDIAC and Qingdao West Coast Holding (International) Ltd (“QWCH”) have not reached any agreement to further extend the Long Stop Date. To recap, MEDIAC was set to receive a net disposal gain of c.HKD359m post disposal. OMG is principally involved in print, digital and outdoor media businesses in Greater China and publishes five magazines in Hong Kong, including Ming Pao Weekly, MING Watch and TopGear Hong Kong. The group has recorded a turnover of HKD104m (-24% YoY) in FY17 but with wider net loss of HKD62m (vs. –HKD15m in FY16), no thanks to the weak advertising revenue coupled with HKD38m provision for impairment on trademarks. Its 1Q18 turnover continued to weaken as compared to a year ago (HKD22m vs. HKD25m) with higher net loss of HKD7.7m (vs. 1Q17: HKD4.6m) as a result of the weak print advertising market.

Cloudy sentiment remains. The group’s adex revenue, meanwhile, is expected to remain challenging in view of the subdued consumer spending. Despite MEDIAC remaining 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 demand, the overall adex sentiment is still expected to remain cloudy in 2017. Note that, the country’s gross adex has weakened to RM3.5b (-14.3% YoY) in YTD-July 2017. While the country’s gross adex is expected to improve gradually in the remaining months (thanks to various holiday festivities and seasonal factor), we are still targeting the overall adex to perform lower (by -10.5% YoY) as compared to 2016. In addition to being focused on its core businesses, we understand that the group intends to accelerate its digital business and broaden its revenue stream through cross-platform advertising. At the same time, MEDIAC is also set to continue its cost optimization efforts and manpower rationalization in order to improve profitability.

Catalyst removed. The lapse of the share transfer agreement suggested that potential special goodies may no longer be on the cards (where we earlier anticipated the group to reward its shareholders’ posts the disposal of OMG). With the continued cloudy adex outlook, the group (similar to other print incumbents) is set to face a challenging time ahead.

Target price reduced to RM0.47. We have reduced FY18/FY19E core PATAMIs by 0.9%/2.4% after re-incorporating OMG contribution (with losses as a result of the weak print advertising market). Correspondently, our MEDIAC target price is also cut to RM0.47 (from RM0.60 previously), based on lower targeted FY19E PER of 11.7x (implied -1.0x SD below its 5-year mean vs. 5-year average mean of 14.7x previously) in view of the absence of catalyst. The stock rating, meanwhile, is also downgraded to MARKET PERFORM from OUTPERFORM previously.

Source: Kenanga Research - 07 Sep 2017