MEDIA is likely to conduct more kitchen sinking exercise in coming quarters. Moving forward, while we concur with MEDIA’s Odyssey strategy, the evolution of the traditional media could lead the group to experience some gestation periods. Post model update, we trimmed our FY17E/FY18E core PATAMI by 1.2%/3.2%. Maintained UNDERPERFORM call on MEDIA but with a lower target price of RM0.550.

Aiming for a fresh start. Despite MEDIA incurring a total of RM194m in exceptional items (RM142m impairment of investment in MNI and RM52m in the early retirement scheme (“ERS”)) in 9M17, more kitchen sinking exercises are likely to be conducted in the next few quarters before it starts a new chapter in the 2H18. Although management is reluctant to share the details, we believe further cleaning-ups are likely to come from its Print division. Besides, we also believe that MEDIA may consider lightening its balance sheet to enhance assets and operational efficiencies as well as to provide provision for its overhead cost. Note that, MEDIA had an aggregate publishing rights & outdoor concession rights of RM200.5m (which is subject for an impairment test on an annual basis) and a cumulative RM115m NBV in its printing plants as of end-FY16.

Expecting Odyssey strategy to bear fruit in 2H18. While MEDIA is making no secret that its traditional media platform is facing a great challenge, the group also sees opportunities in the evolution of traditional media. The group has outlined its plans under the Odyssey strategy (in May last year), which 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 the group’s Odyssey revenue has increased to RM119m (>100% YoY), it is still suffering LBT of RM36m in 9M17, largely due to the gestation period in its e-commerce business. Nevertheless, we understand that MEDIA is aiming for the division to be EBITDA positive in late FY18 or early FY19 in view of the current rising e-commerce trend.

Higher newsprint prices but partially cushioned by stronger Ringgit. Newsprint prices have been trending higher gradually since early 2017 to USD550-600 level in the recent months (supported by modest tightening in the global market balance following some printing plants closure in Asia and Europe coupled with cost pressures), posing earnings risk to print-based companies. Having said that, the earnings risk could somehow be mitigated by the recent stronger MYR.

Proposed regulated prices for DTTB may appear to be positive bias. Despite the negotiations on the transmission cost (under the Digital Terrestrial Television (DTT) Broadcasting service) is still on-going, the rate is likely to come in better than market expectation based on the preliminary Review of Access Pricing plan for the year 2018-2020 that was proposed by the MCMC. While the pricing has yet to be firmed up by the authority, the rate appears cheaper than the market expectation (c. RM25m/HD channel) given that each HD channel is now proposed to be charged at RM11.4m/RM13.5m/RM11.5m per annum (and RM7.2m/RM8.6m/RM7.8m for each SD channel) for year 2018-2020. Having said that, the proposed HD frequency rate is still 30-35% higher compared to MEDIA’s current annual transmission cost of c.RM35m-RM40m (for four channels).

Not out of the woods yet. While we concur with management’s strategies, the evolution of the traditional media could lead the group to experience some gestation periods over the short-to-medium term. In view of more kitchen sinking exercises ahead, a clearer picture can only be seen in the 2H rather than early 2018.

Maintained UNDERPERFORM with lower TP of RM0.550 (from RM0.600 previously) based on targeted FY18E P/BV of 0.64x, implied an unchanged -2.0x SD below its 5-year mean. We have reduced our FY17E/FY18E core PATAMI by 1.2%/3.2%, respectively, after factoring (i) higher newsprint cost assumption (to USD570/MT from USD520/MT), and (ii) stronger USD/MYR of RM4.10 vs. RM4.30 previously. On a reported basis, our FY17E/FY18E PATAMI is cut to –RM484m/RM25m (from –RM283m/RM26m previously) after assuming RM150m impairment loss on its print division and RM50m overhead-related provision incurred in 4Q17.

Source: Kenanga Research - 02 Jan 2018