We reiterate our negative stance on Media Prima Berhad. Straying from historical trends, advertisers are no longer spending big towards the year end, implying 4QFY16 revenue will likely be flat sequentially. The outlook for traditional media remains challenging in 2017 – with the CSI still below 100, coupled with a continue shift to digital mediums. While the group has recently closed two of its printing plants, this may not signal the end of restructuring efforts. This is if the adex environment remains weak and its operations turns unprofitable. An expected general election may help stimulate adex, but this will only serve as a short term catalyst. We also expect its home shopping business to remain a drag on earnings, with a gestation period of 2.0 years. Projecting flattish adex, we cut our FY18-19 earnings by 14.8-21.9%. Lower our TP to RM0.85/share. SELL.

No Year End Fireworks

As previously guided, adex spending is predicted to remain soft till the end of the year. We expect 4QFY16 will still be tough, with revenue likely to be flat sequentially. Differing from historical trends, advertisers are no longer spending big towards the year end. Reported bottom line, however, should improve due to the exclusion of one-off restructuring costs (RM104.6mn) in the 3QFY16.

What to Expect in 2017?

Traditional Media Will Still Be Challenging

Looking forward, the FY17 outlook for traditional media remains murky. Advertisers are expected to remain defensive amid looming uncertainties. The consumer sentiment index (CSI) is still below 100. After a rebound in 2Q2016, the CSI lost 4.9pp QoQ to 73.6 in 3Q2016. Another factor is the shift to digital platforms. Print circulation continues to be on a declining trend, while the rise of over-the-top content provides an alternative to TV viewership.

Continued Weakness May Lead to Further Cost Cutting Measures

In 3QFY16, the group closed its printing plants in Ajil, Terengganu and Senai, Johor. Still in operation till November 2016, annual operational cost savings of RM20.0-24.0mn are expected to be realised in the coming year. However, this may not signal the end of its restructuring efforts. On condition that the weak adex environment persists and its operations turns unprofitable, we do not discount the possibility that further restructuring exercises could be implemented. While its TV network is profitable as at 9MFY16, we calculated core losses of RM4.4mn in the 3QFY16. For NSTP, even after factoring in operational savings from the plant closures, the division still appears to be loss making.

General Election May Serve as Short Term Catalyst

A potential general election (GE) will act as a short term catalyst for the group. The period typically coincides with increased adex spending from government linked and multinational companies. Analysing past data, we note a build-up of adex growth in the months preceding and during the GE. However, this does not buoy our general expectations of the industry, as we expect adex to gradually level off after the event. There are also uncertainties regarding the timing of the event, as the GE can be held on or before 24th August 2018.

New Initiatives Will Still Need Time

While it has made some efforts in diversifying revenues, new ventures will still require time before contributing positively to bottom line. Particularly, its home shopping venture, CJ WOW Shop, has done well since its launch in April 2016. To date, it has had over 350k orders and is targeted to achieve a revenue of RM150mn in FY17. Although the group would ultimately prefer a dedicated home shopping channel, it has in the meantime allocated more airtime for its home shopping programme. On weekdays, the number of hours have increased to 19.5 hours across all channels from 16.5 hours previously. Nonetheless, the business is likely to remain a drag on bottom line, with a targeted breakeven timeline of two years.

Cut FY17-FY18 Earnings

We tweak our assumptions to assume flattish FTA TV and Print adex moving forward. We cut our FY17/FY18 earnings by 14.8%/21.9% to RM86.1mn/RM89.1mn.

Valuation

We lower our TP for Media Prima Berhad to RM0.85/share (from RM1.00/share). This is based on an unchanged PE of 11.0x and CY17 EPS of 7.8sen. We remain negative on the stock amid challenges in its FTA TV and Print segment, which makes up 81.8% of its revenues. While there are efforts to diversify its revenues, contributions from these initiatives remain small and are likely to remain a drag on earnings in the near future. SELL.

Source: TA Research - 17 Jan 2017