KEY INVESTMENT HIGHLIGHTS

• 2Q20 normalised earnings of –RM8.6m came in above both our and consensus expectations

• 2H20 advertising revenues expected to remain subdued but partially compensated by the group’s non-advertising sales

• Continuous cost-optimisation measures undertaken could partially assist to narrow the group’s losses moving forward

• Upgrade to NEUTRAL with a revised target price of RM0.17

Above expectations. Media Prima Berhad (MPB) normalised losses in 1H20 narrowed to -RM37.5m (-26.2%yoy). To note, we have excluded the termination benefits charge of RM11.3m in the normalised earnings calculation. We gather that the improvement in the normalised losses was mainly due to the reduction in the group’s operating expenses by -13.2% attributed to the group’s ongoing cost optimisation initiatives. Moving forward, we would expect the group to be able to operate on a lighter foot as a result of the reduction in their operating leverage.

2H20 advertising revenues expected to remain subdued but partially compensated by the group’s non-advertising sales. The group registered their 1H20 revenue of RM474.7m, showing a decline of -11.4%yoy. As expected, the decline was mainly due to further drop in the group’s advertising revenue as most companies were reducing their advertising spending in response to the dismal economic conditions brought on by the Covid-19 pandemic. The decreasing adex revenues however were partially compensated by the increase in the homeshopping and digital revenues at +33.7%yoy and +5.5%yoy respectively in 1H20. Taking into account the above, we anticipate the financial performance from these segments to be able to partially assist in narrowing the group’s revenue contraction moving forward.

Continuous cost-optimisation measures undertaken in response to the Covid-19 pandemic. In line with MPB’s business transformation plan, we note that MPB had further reduced 300 employees from their workforce last July. This was the second retrenchment exercise for the year after the reduction of 900 employees back in March. Based on calculations, we would anticipate the layoff of the 300 staffs would reduce expenditures by roughly RM27.5m per annum (excluding the termination benefits). Aside to that, we gather that MPB had announced that it may terminate their leaseback deal with PNB for Balai Berita in Bangsar. As the group plans to consolidate their operations into three locations, if this plan materializes, the group could potentially save roughly RM18.6m of rental and maintenance fees per year. In view of this, we postulate the potential cost-savings could assist in narrowing further the group’s losses moving forward.

Earnings estimates. Factoring in the better-than-expected earnings this quarter along with the estimated cost savings from the recent manpower rationalization exercises, we have adjusted our earnings estimates for FY20E/FY21F/FY22F to - RM103.8m, -RM61.2m and -RM17.6m respectively.

Target price. Based on our revised estimates, we derive to a new TP of RM0.17 (previously RM0.12). Our TP is derived by pegging its target price-to-book ratio of 0.5x (previously 0.6x) which is the group’s two-year historical average to its FY21 book value per share of 35sen.

Upgrade to NEUTRAL. Moving forward, we posit that businesses across all major sectors are to continue being cautious on their advertising budget as a way to conserve their cash flow. Thus, in view of limited adex catalysts for the year coupled with absence of potential corporate exercises to further improve the situation, we anticipate MPB’s future earnings to remain lacklustre but to some extent supported by the cost savings derived from the group’s recent cost-optimisation efforts along with contribution from the group’s non-advertising segments (i.e. home-shopping and digital). Therefore, we upgrade our recommendation to NEUTRAL from SELL on MPB

Source: MIDF Research - 28 Aug 2020