MEDIAC’s 1HFY24 results grossly underperformed expectations as adex weakness prevailed. Furthermore, this was exacerbated by: (i) decline in digital traffic following changes in Facebook’s news feed algorithm, and (ii) dial back in government subsidies. We now project wider losses in FY24F-25, lower our TP by 33% to RM0.10 (from RM0.15) and downgrade our call to UNDERPERFORM (from MARKET PERFORM).

Washout year. 1HFY24 results disappointed, with a core net loss of RM21.7m, against our full-year net loss forecast of RM3.2m. The variance against our forecast was largely due to lower-than-expected adex at the publishing segment.

YTD losses due to topline and cost headwinds. 1HFY24 topline growth (+20% YTD) was mainly driven by the travel segment as turnover more than quadrupled YTD. This was propelled by: (i) North America operation on inbound tours from customers in Southeast Asia, (ii) Hong Kong operations driven by outbound tours to Europe and China, and (iii) student tours for summer programs.

On the other hand, segmental revenues at MCIL’s bread-and-butter publishing and printing business contracted by an estimated 11%. This was primarily due to the decline in digital traffic through the group’s websites. This arose from changes in Facebook’s news feed algorithm which resulted in fewer readers being directed to MCIL’s sites. Correspondingly, this was reflected in the 10% decline in 1HFY24 adex.

As a result, the group slipped into 1HFY24 core net loss of RM22m (1HFY23: RM300k profit). Additionally, the losses were also attributed to: (i) higher newsprint and raw material costs, and (ii) dip in government subsidies to USD74k (6MFY22: USD1.88m) at its Hong Kong and Taiwan operations. Hence, this more than negated the turnaround at the travel segment.

Bright spot from sustained QoQ recovery at the travel segment. Sequential losses were sustained for the third consecutive quarter due to the headwinds mentioned above. On a brighter note, PBT at the travel segment more than doubled in 2QFY24 after having turned around in 1QFY24. Moreover, there is room for upside as business volumes have yet to revert to pre-pandemic levels.

No respite in sight. We expect sustained losses for MCIL’s publishing business in the near term given sustained loss of adex market share. Based on Nielson data, the share of total annual adex (excluding pay-TV) for major newspapers published by MCIL has progressively plunged from 10% in 2016 to 4% in 2022. Similarly, magazines in general are also continuously losing market share in Malaysia. Their share of 2022 adex has dipped to merely 0.4% versus 1.4% back in 2016. As such, the outlook for traditional publishers remains gloomy given the structural trend where eyeballs are shifting to new digital platforms such as social media, apps and websites. Unfortunately, newspaper and magazine websites are unable to capture their lost market share - as evident from youtube.com’s significant share (88%) of digital adex in 2QCY23. Therefore, although MCIL has presence in digital media via websites for its newspapers and other lifestyle portals, it does not generate enough adex to cover its fixed costs.

Forecasts. We now project wider losses in FY24-25 to reflect lowered adex assumptions.

We also lower our valuation on MCIL to 0.3x FY25F P/NTA (from 0.4x), which implies a discount of 25% versus the sector’s historical average of 0.4x forward P/NTA. The discount reflects expectations of sustained significant losses in the near-tomedium term, as well as its smaller market cap relative to peers. As a result of this, and coupled with the cut in our forecasts, our TP is lowered by 33% to RM0.10 (from RM0.15). There is no adjustment to our TP based ESG given a 3-star rating as appraised by us (see page 5). Downgrade to MARKET PERFORM from OUTPERFORM.

Key risks to our call include: (i) recovery in adex for traditional media, (ii) surge in international tourism amidst expansion in travel operations, and (iii) value accretive M&A to diversify from its legacy businesses.

Source: Kenanga Research - 30 Nov 2023