Media Chinese Int’l (MEDIAC)’s 1H18 core PATAMI missed expectations due to lower-than-expected turnover and higher COGS. The prolonged subdued consumer spending coupled with a shift in advertisement to digital media continued to pose great challenges to the group. We lowered our FY18E/FY19E PATAMI by 15% each post the earnings model updates. Maintain MARKET PERFORM rating but with a lower TP of RM0.400 based on a targeted FY19E PER of 11.6x.

Missed expectations. 1H18 core PATAMI of RM24.2m (-44% YoY) came in below our/consensus full-year estimates (at 47%/40%) owing to lower-than-expected revenue (-9%) and GP margin. Note that the group’s 1H normally made up c.55-62% of the full-year PATAMI, based on the past three years. The group has declared a 1.07 sen (or US 0.25 cents) interim dividend (with the ex-date set on 11 December), which came in within expectation and made up 53% of our full-year DPS estimate.

YoY, 1H18 revenue slipped 9% to RM649m, no thanks to the weaker lion’s share publishing and printing segment (-15% to RM435m) despite better performance in the travel segment (+9%). 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 9% (to RM213m) at the top-line underpinned by better outbound travel business for the North America tour operations followed the stronger US dollar and CAD. At the pre-tax level, PBT dropped by a larger quantum of 38% as a result of unfavourable exchange rate as well as lower GP margin. Stripping off the currency impact, 1H18 turnover would have weakened by 6% while its PBT would have dropped by 33%.

QoQ, 2Q18 turnover improved by 8% driven by the higher revenue from both the publishing & printing (thanks to higher Malaysian operation where the turnover rose by 4.6% as a result of higher advertising and circulation revenues) as well as the travel segments. PBT, meanwhile, advanced by 31% on a higher turnover coupled with better margin recorded in the publishing and printing as well as the tour segments.

Gloomy sentiment remains. The country’s adex outlook is expected to remain cautious in view of the subdued consumer spending and the continuing shift of print advertising dollars to the digital media. In addition, newsprint price has started showing signs of an upward trend, which could further put pressure the group’s performance.

Reduced FY18E/FY19E PATAMI by 15% each after imputing a lower adex revenue and GP margin assumptions. Correspondingly, our MEDIAC TP is reduced to RM0.400 (from RM0.470 previously) based on a targeted FY19E PER of 11.6x (implied an unchanged -1x Standard Deviation below its 5-year mean). With the lack of key earnings catalyst ahead, a decent dividend yield of c.5% appeared to be the only saving grace for the stock. Maintained at MARKET PERFORM.

Key downside risks to our call include: (i) weaker-than-expected adex outlook, and (ii) higher-than-expected OPEX.

Source: Kenanga Research - 29 Nov 2017