KUALA LUMPUR (July 5): Media Prima Bhd's repurchase of its headquarters in Bangsar here suggests that it is now more confident of its financial position and that it believes that its earnings are now more sustainable, says Hong Long Investment Bank (HLIB) Research.
Last Friday (July 2), Media Prima announced that it is paying RM156.4 million to repurchase Balai Berita Bangsar, which it sold to Permodalan Nasional Bhd (PNB) at RM118.7 million back in 2018.
The repurchase is still subject to Media Prima shareholders’ approval at an extraordinary general meeting.
The media group was supposed to vacate the building in July last year as part of its plan to consolidate its operations, but the plan did not materialise.
HLIB Research analyst Tan Kai Shuen said the group's earnings position is now much better than what it was in the financial year ended Dec 31, 2017 to 2019 (FY17-19), when it posted core losses.
"Besides that, the group is also looking forward to its future growth by investing in new studios to develop its content production segment. The implied rental savings yield by purchasing the said properties is 5.5% (RM720,000 × 12/RM156.4 million) which safe to say, is higher than the return on cash in this current low interest rate environment,” said Tan in a note to investors today.
HLIB Research has upgraded Media Prima to a "buy" call from "hold", with an unchanged target price (TP) of 61 sen pegged to a price-to-book multiple of one times.
“We believe that Media Prima’s future earnings growth will be supported by its home shopping business, digital segment as well as from the stronger advertising expenditure (adex) sales through its integrated advertising solution OMNIA. Coupled with a leaner cost structure, its earnings are now more sustainable which should weather through short-term headwinds,” said Tan.
As at March 31, 2021, Media Prima had a net cash position of RM212.3 million. Post-purchase, its net cash position will drop to RM56 million, he added.
CGS-CIMB Research is neutral on the proposed purchase as it is of the view that Media Prima could have identified other locations to house its growing content division in this distressed real estate market.
"The higher purchase price could be a sticking point for some shareholders, especially in this Covid-19 era. By right, Media Prima could pick up other properties at fire-sale prices. Perhaps the group is justifying the premium with intangibles that may not be perceptible to its financials: the Bangsar address, connectivity to various public transport systems for employees’ convenience and the historical value," said CGS-CIMB’s analysts Kamarul Anwar and Mohd Shanaz Noor Azam.
“Balai Berita’s rental fee comes to RM720,082 per month or RM8.6 million per year. Since the lease is expiring in 2021, there is a likelihood that the rent will be higher if it is renewed.
“While the purchase will free the group from the Balai Berita rental commitment, just how much of the savings can be ploughed back to boost its future profits remains up in the air. If Balai Berita is depreciated using the straight-line method over 99 years, the depreciation value per year will be RM1.6 million.
“And depending on how much of the purchase price will be financed by bank borrowings, the interest cost will range from RM3.1 million to RM7.8 million at an interest rate of 5%, if Media Prima borrows to pay 40% to 100% of the purchase cost. After eliminating the 24% corporate statutory tax rate, the additional expenses could come to between RM3.6 million and RM7.1 million,” they added.
The research firm viewed that the net profit accretion from buying Balai Berita would be minimal at best, maintaining its "add" call on the company with an unchanged TP of 88 sen.
PublicInvest Research said although Media Prima’s business operations have improved, this repurchase could lead to lower earnings as operating cost may increase.
Its analyst Eltricia Foong expects the group’s adex to be affected in the immediate term given weaker economic activities caused by the resurgence of Covid-19 cases followed by a tighter lockdown.
“In view of this uncertainty, we have lowered our valuation based on a three-year forward book value of 0.8 times (previously 1 times). Consequently, our TP is reduced to 52 sen," she said, maintaining a "neutral" call on Media Prima's stock.
At noon market close, Media Prima shares were down 0.5 sen or 1.12% at 44 sen, bringing a market capitalisation of RM482.62 million. A total of 505,400 shares were traded.