This article first appeared in The Edge Financial Daily, on November 23, 2015.

Media Prima Bhd 
(Nov 20, RM1.37)
Maintain buy with a higher fair value of RM1.65: We maintain our “buy” call on Media Prima Bhd with a higher fair value of RM1.65 per share (versus RM1.50 per share previously), based on our discounted cash flow valuation, as we inch up our earnings and adjust our weighted average cost of capital assumptions (from 9.4% to 8.4%).  

The management declared a second interim dividend of two sen, bringing nine-month ended Sept 30, 2015 (9MFY15) total dividend to five sen (9MFY14: six sen). The dividend is generally in line with our conservative FY15 dividend per share (DPS) estimate of 10 sen (FY14: 11 sen), a payout ratio of 72%. 

Third quarter ended Sept 30, 2015 (3QFY15) core earnings came in at a decent RM44.2 million, bringing 9MFY15 earnings to RM107 million, which were in line with our and consensus estimates at 73% respectively.

Year-on-year (y-o-y), 3QFY15 earnings came in higher by 5.9%, improving across all its segments. Improvement on earnings was a result of Media Prima’s strict cost-efficiency initiatives undertaken and also lower direct costs resulting from the voluntary separation scheme in 4QFY14. 

This was despite a softer advertising expenditure (adex) environment and consumer sentiment, which saw Media Prima’s year-to-date (YTD) revenue decline by 5%. 

Television in particular, which contributes more than 50% of total profits, saw its 3QFY15 profit after tax advanced by 14% y-o-y. Quarter-on-quarter (q-o-q), 3QFY15 earnings improved by 6.6% as the festive season during the quarter favoured all segments, apart from print.

Print declined by 30% q-o-q, hit harder by the segment’s 7% decline in revenues due to lower adex and circulation revenues. However, its YTD earnings improved by 16% y-o-y due to better printing yields and cheaper newsprint costs. 

The decline of the ringgit/US dollar exchange rate is expected to have a neutral impact on Media Prima. Media Prima has a favourable arrangement to source its newsprint locally from Malaysian Newsprint Industries Sdn Bhd, at the rate of about RM1,750 per tonne, which is attractive compared with current market prices of US$550 (RM2,640) per tonne. Content-wise, Media Prima will work within its allocated budget to obtain its foreign content. 

It is not locked into any service contract denominated in the US dollar. While the adex outlook continues to be subdued, we should see higher revenue in 4QFY15 due to festivities and companies maxing out their remaining adex budgets.

Given Media Prima’s dividend policy of 60% to 80% of the payout ratio, we believe that our DPS estimate of 10 sen is possible. This translates into an attractive dividend yield of 7.5%.

The stock is trading at an undemanding FY15F (forecast) price-earnings ratio (PER) of 10 times, trading below the average of its five-year historical PER band of 11 times. Media Chinese International Ltd and Star Media Group Bhd are currently trading at eight times and 13.5 times respectively. — AmResearch, Nov 20