• 1HFY17 normalised earnings sank into the red due to unsustainable cost structure

• Expecting full year FY17 to be breakeven at best

• Efforts to improve financial position may lead to absence of dividend payment for FY17

• Maintain NEUTRAL with a lower target price of RM0.77

Appalling financial results. Media Prima Berhad (MPB) reported 2QFY17 loss of -RM132.9m. After adjusting for exceptional items of - RM141.9m, the 2QFY17 normalised earnings amounted to RM9.0m (- 66.8%yoy). The bulk of the exceptional items pertained to a one-off impairment on Malaysia Newsprint Industries Sdn Bhd (MNI), an indirect associate (21.36%) of MPB, totalling -RM142.4m. This has led to 1HFY17 normalised loss of -RM29.8m. We view the existing cost structure of the group can no longer match the revenue generated from the various business segments. All in, MPB’s 1HFY17 financial results came in severely below ours and consensus estimates.

Impact. We are now expecting full year FY17 normalised earnings to come in at RM3.1m (previously RM53.5m) due to the challenging business landscape and unsustainable cost structure. In view of this, the management is currently taking proactive steps to revise the group’s overall business models and the respective cost structures. We suspect MPB may be right-sizing its existing workforce to fit the new business model. Traditionally, employee costs form approximately 30% to 35% of the group’s total cost. We expect the cost rationalisation exercise to extend through into FY18. To be on the conservative end, we are also revising downward our FY18 earnings estimate by -67.8% to RM22.3m.

Dividend. As at 2QFY17, the group has existing short term borrowings of RM300m. Coupled with the transformation the group is currently embarking on, we are now expecting there will be no dividends for FY17. Moreover, we suspect the borrowings could be refinanced due the group’s poor cash generating ability at this juncture.

Target price. Due to the volatility and unpredictability of the group earnings in the near term, we are revising our valuation methodology to price-to-book ratio (PBR) from price-to-earnings ratio (PER) previously, deriving a new target price of RM0.77 (previously RM0.91). This is based on pegging FY18 forecasted book value of RM1.10 per share against forward PBR of 0.7x which is the five-year historical average.

Maintain NEUTRAL. We opine that MPB’s traditional core businesses will continue to negatively impact the group’s overall financial performance. This has led the company to rethink its business models in its entirety via the execution of its transformation strategy dubbed the “Odyssey Strategy” (Refer to Appendix I). The group is now aiming to grow revenue from the non-advertising, non-TV/print, international and digital segments. While we applaud the group’s effort to reform, we do not expect any financially significant turnaround in the near-term. This will inadvertently impact the group’s cash generating ability which would in-turn place the group in a tight financial position. Thus, we would advise investors to explore other media companies which have a more sustainable business model and healthier balance sheet. Given the lack of rerating catalyst in the near-term, we are maintaining our NEUTRAL stance on the stock.

Source: MIDF Research - 15 Aug 2017