MEDIAC surged more than double in HKEX (as its affiliate’s IPO was heavily oversubscribed), which could provide an arbitrage opportunity to Bursa-listed MEDIAC’s shareholders. Nevertheless, the arbitrage opportunity could diminish rapidly should trading sentiment change. We made no changes to our FY18/FY19E earnings estimate and downgrade the stock rating to UP with an unchanged target price at RM0.35, based on targeted FY19E PER of 11.4x (implied -1x Std Dev below its 5-year mean).

Arbitrage opportunity emerging? MEDIAC closed at a strong note at RM0.43 (+c.25%) yesterday, tracking gains of its dual-listing in Hong Kong, which surged 274% over the past 2 days to HKD2.69 (or RM1.34). The surge was mainly due to the IPO of Most Kwai Chung, in which MEDIAC holds a 10% stake (or 7.5% stake post listing), witnessing overwhelming interest in its IPO subscriptions. While the current massive share price differential could provide arbitrage opportunities to MEDIAC’s shareholders, one should take note that the share transfer (from Bursa Securities to the Hong Kong Stock Exchange (“HKEX”), and vice versa) is subject to stamp duty and share registration, which could take weeks. Thus, the arbitrage opportunity may potentially diminish by then given the high trading volatility in HKEX. Besides, the negligible financial impact (to MEDIAC due to its insignificant stake in MKC) could also cool down the irrational trading sentiment.

Most Kwai Chung (“MKC”), the operator of online video outlet TVMost and local satirical magazine - 100Most, has reportedly secured HKD22.6b in its IPO, recording an over subscription of 2,790 times for its retail tranche, according to The Standard (the local English newspaper). MKC started book building last Friday and is set to issue 67.5m shares (representing 25% of the enlarged share capital) at between HKD1.00- 1.20/share. It aims to raise up to HKD81m and will make its debut on 28 March 2018. The group has recorded a strong PAT of HKD43m (+63% YoY) in FY17 on the back of sturdy revenue of HKD95m (+74% YoY, mainly driven by aggressive expansion of its digital media services, which accounted for 72% of the total group’s turnover). Its 8M18 revenue, however, declined by 27% YoY to HKD55m, no thanks to the absence of events’ segment and lower print media contribution. The lower revenue coupled with non-recurring listing expenses of c.HKD9.2m (with HKD12.2m yet to be recognized) has resulted in MKC’s PAT dipping 84% YoY to HKD5.1m. For the full financial year, MKC expects to record lower YoY in PAT due to: (i) lower margin in its print media segment, and (ii) higher OPEX.

Positive impact to the balance sheet. The sturdy over-subscription for MKC’s share could suggest potential strong share price performance ahead. This may have a positive impact to MEDIAC’s non-current assets (under investments accounted for using the equity method) and total equity but not the profit & loss statement (with no extraordinary gain is likely to be recorded in "other incomes") based on the group’s current accounting policies.

Ominous sentiment remains. While we expect the country’s gross adex (ex-Pay TV) to climb 4.5% YoY in CY18 (driven by the low base effect and pre-14th General Election-led adex push), the overall 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 prices are expected to continue trending upwards, which could further put pressure on the print incumbents. Besides, MEDIAC’s travel segment is also expected to continue to face challenges such as competition from airlines, reducing margins and travel restrictions imposed by the US government, which could dampen travelling activities.

Sell-on-Strength. We downgrade the stock rating to UNDERPERFORM (vs. MARKET PERFORM previously) given the lack of key earnings catalyst amid challenging adex outlook. Having said that, in view of the current strong trading sentiment, we would advocate investors to ride with the trend and sell-on-strength progressively.

Source: Kenanga Research - 21 Mar 2018