Media Prima (MEDIA) continued to bleed red ink, but 2Q19 losses narrowed thanks to the festive season. Moving forward, we expect softer adex outlook in 2H19, while cost savings initiative would be redirected to fund digital initiatives. With no immediate catalyst, we made no changes to our UNDERPERFORM call on MEDIA with an unchanged target price of RM0.260 premised on a P/NTA of 1.0x (in-line with its historical-low P/NTA, and implied c.-1.5xSD below its 3-year mean)

Expected losses. 1H19 core LATAMI of RM46.9m is deemed to be within our expectation but below consensus with respective FY19E losses of RM81.7m and RM56.3m. Going forward, we continue to anticipate losses from the group, as it struggles on declining revenue streams outpacing any cost saving initiatives implemented. As expected, no dividends were announced during the quarter.

YoY, 1H19 revenue came in lower at RM535.9m (-14.0%), no thanks to an overall decline in its traditional media segment, mainly TV and print. However, the decline was partially mitigated by its home shopping segment, which continued to see growing traction given interactive content that connects with the audience. Lower operating expenses of RM588.5m (-11%) were realized from a decrease in direct costs and overheads. However, owing to that cost overrun, 1H19 core LATAMI registered at RM46.9m (-17%). Recall that 1H18 core LATAMI was adjusted to strip off a gain on disposal of associate of RM45.3m.

QoQ, 2Q19 top-line expanded to RM296.8m (+24%), on higher adex spending in tandem with the Hari Raya festivities. Sequentially, the better sales uplifted the group’s earnings and narrowed the losses to a core LATAMI of RM6.5m (+83.9%).

Seeing no light in tunnel yet. 2H19 outlook appears limp, being dry of nationwide events and festivities while soft economic conditions may lead to lower adex appetite. Meanwhile, we believe OPEX will hold at its current level as savings from its traditional business are reinvested to fund its digital and commerce initiative (i.e. CJ Wow Shop, Big+, and on-going digital acquisitions). Any light from the end of the tunnel would only be seen earliest in FY20, should digital revenue expand at a quicker pace than the decline in its traditional media revenue.

Gross adex from the traditional medium is showing no signs of improving, as evidenced by Nielsen's 1H19 updates. We reckon this could be due to the evolving landscape where younger consumers favor digital content and channels over traditional ones. Moreover, we gathered that c.>40% of Malaysia's population are currently aged below 24 years old. However, we believe our assumptions remain intact for now as we had sufficiently forecasted for negative earnings growth previously (1Q19), accounting for higher OPEX assumptions. As such, we made no changes to our assumptions and maintain our numbers.

Maintain UNDERPERFORM rating with an unchanged TP of RM0.260 based on FY19 targeted P/NTA of 1.0x (in-line with its historical-low P/NTA, and implied c.-1.5SD below its 3-year mean) to reflect the on-going structural challenges that the industry faces.

Risks to our call include: (i) better-than-expected advertising revenue, (ii) margin fluctuations, (iii) changes in the regulatory environment, and (iv) better-than-expected Odyssey strategy’s outcome.

Source: Kenanga Research - 23 Aug 2019