1QFY20 LATAMI of RM29.5m missed expectations on cost overrun which remains a concern. The Covid-19 pandemic and movement controls could pose more challenges to the group as advertisers held back, in line with the economic slowdown. Although digitisation efforts could be accelerated contributions, if any could take time. Downgrade to UP (from MP) with a lower TP of RM0.105 as our expected NTA/share fall in line with our lowered assumptions.

1QFY20 slipped into greater-than-expected losses. 1QFY20 core LATAMI of RM29.5m is deemed below estimates. We had anticipated FY20 to be profitable with CNP of RM12.7m but might have been overly optimistic with our cost savings assumptions. Meanwhile, consensus expects a FY20 LATAMI of RM37.6m. No dividend was declared, as expected.

YoY, 1QFY20 revenue was flattish at RM238.4m, as the fall in traditional media channels, mainly television (-8%) and publishing (-7%) was supported by better performance from home shopping (+18%), content creation (+13%) and digital media (+11%). The group posted an EBITDA of RM3.6m (from 3MFY19 LBITDA of RM11.4m) as operating costs was more favourable post- 2019 restructuring. That said, the 1QFY20 fell into a LATAMI of RM29.5m (a 27% improvement from 3MFY19 LATAMI of RM40.4m) having incurred heavier depreciation charges.

QoQ, 1QFY20 revenue fell 22% across almost all segments as the 4Q is seasonally boosted by year-end festivities and holidays. The lower revenue resulted in a 78% decline in core EBITDA and reported core LATAMI (from 4QFY19’s PATAMI of RM11.6m). Adjustments were made to account for termination benefits and one-off impairments amounting to RM116.1m in 4QFY19.

Just can’t catch a break. Having concluded its cost rationalization exercises for the television and publishing segment, the group seems poised to operate with lighter feet. That said, the Covid-19 pandemic and movement controls may bring a mixed bag of possibilities. One could argue that more home bound arrangements could temporarily reinvigorate the television medium. However, the slowing down of economic activity could also lead advertisers to tighten their pockets, especially with consumer spending being drastically skewed towards essentials. That said, digital channels and home shopping could benefit from the accelerated shift in consumer behavior, which may on the other hand dampen the group’s physical advertising business.

Post-results, we tweak our assumptions for FY20E/FY21E to register losses with LATAMI of RM50.0m/RM29.0m from PATAMI of RM12.7m/RM17.0m.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower TP of RM0.105 (from RM0.145). Our valuation of 0.7x FY21E P/NTA remains unchanged, with the continued losses deteriorating its balance sheets. Our valuation implies trough valuations at 2SD below the 3-year mean. Though the group may not undertake another restructuring program in the immediate future, the declining advertising revenue trend could persist, dragging the group into deeper losses. It could also be a long-term endeavor for non-traditional channels to outweigh the traditional predecessors and to be profitable.

Risks to our call include: (i) higher-than-expected advertising revenue, (ii) lower-than-expected operating expenses, (iii) changes in the regulatory environment.

Source: Kenanga Research - 22 May 2020