MEDIAC issued a profit warning for 9MFY21 to register losses of USD3.4m – USD3.7m (est. RM14.3m – RM15.5m). This implies that 3QFY21 would be profitable as 6MFY21 posted LATAMI of USD4.9m. We believe the boost in earnings is due to advertisers once again finding solace in traditional platforms such as newspapers and magazines. That said, the travel segment is expected to remain a drag. We raise FY21E/FY22E earnings by 48%/74% and maintain UP with a higher TP of RM0.155 (from RM0.150).

Guidance shows progressive improvement. Last Friday, MEDIAC guided for its 9MFY21 losses to be in the range of USD3.4m – USD3.7m (est. RM14.3m – RM15.5m). With 6MFY21 posting a LATAMI of USD4.9m, this implies that 3QFY21 would be profitable, posting earnings of USD1.2m – USD1.5m (est. RM5.0m – RM6.3m). Recall that 1HFY21 LATAMI was reduced by USD0.8m thanks to the recovery in all publication fronts in 2QFY21 despite its travel segment registering close to a 100% decline in revenue YoY.

We believe with that movement restrictions easing up, advertisers are reverting to traditional platforms, thus bumping up MEDIAC’s advertising revenue for both newspapers and magazines. Locally, total gross adex numbers gathered by Nielsen for the period October – December 2020 shows the recovery of magazine adspend by 47% QoQ after declining for 3 consecutive quarters while newspapers adspend QoQ declined slightly but remained stable. In addition to the rise in advertising revenue, we believe the improvement in 3QFY21 could also be due to the Group’s tight cost cutting measures in all publication fronts while also taking some drastic measures to cut all expenditure in the travel segment in order to keep its travel business afloat.

Travel segment to remain muted. YTD, the travel segment has recorded a sharp decline in revenue (-99.9% YoY) and we anticipate the recovery to take place slowly as many countries have ongoing travel restrictions and are still enforcing tight movement controls.

Strategies in place. While the group is heavily involved in implementing cost management initiatives such as reducing staff force, the group is continuing to seek ways to grow its digital audience and revenue to adjust to the new norm. Notably, the group organised a virtual expo and webinar last year whereas its Hong Kong segment launched an e-commerce platform, Power Up Store, in 2020.

Post guidance update, we raise our FY21E/22E earnings assumptions by 48%/74% in respect to the initiatives taken by the group and the return of newspaper and magazine advertising revenue. However, despite the group’s gradual recovery, we still expect FY21 to post LATAMI of RM7.5m (-127% YoY) as we believe its travel segment could continue to drag earnings in the near-term. We continue to expect no dividend payments for FY21/FY22 as the group straps its cash reserve tightly.

Maintain UNDERPERFORM with a higher TP of RM0.155 (from RM0.150, previously) based on FY22E P/NTA of 0.4x (in-line with 1 SD below its 3-year mean). We leave our valuations unchanged for now as the group’s travel segment may take time to recover and thus the group will depend on its adex and digital revenue to post positive earnings. Should the need to capitalize on attractive investment opportunities arise, the group is backed by a solid cash pile which stands at 14.0 sen cash per share.

Key risks to our call include: (i) higher/lower-than-expected adex revenue, (ii) higher/lower-than-expected travel services business, and (iii) higher/lower-than-expected operating expenses.

Source: Kenanga Research - 8 Feb 2021