MEDIA’s 9MFY24 results disappointed as opex surged and the Out-of- Home (OOH) segment turned loss-making. Despite the 14% YoY expansion in total industry adex (excluding PayTV), MEDIA’s adex declined by 1% YoY. We cut our FY24-25F earnings by 25%and 8%, respectively, lower our TP by 7% to RM0.32 (from RM0.34) and maintain our UNDERPERFORM call.

Missed due to cost drag. Its 9MFY24 core net profit of RM13.0m underwhelmed, coming in at only 43% of our full-year forecast and the full- year consensus estimate. The shortfall versus our forecast largely emanated from higher-than-expected overheads across all segments except for digital media.

Top and bottomline pressure prevails. 9MFY24 revenue contracted by 7% YoY, mainly due to: (i) weaker TV content distribution revenue, and (ii) lower sale of home shopping goods. To a lesser magnitude, topline was dragged by reduced adex (-1% YoY) and newspaper sales (-11% YoY).

The combination of weaker turnover, coupled with opex pressure led to the 17% YoY dip in EBITDA. The weakness was particularly evident at the Out-of-Home (OOH) segment where earnings slipped into the red. Therefore, the OOH and digital media segments were the primary earnings drag.

On the bright side, 9MFY24 core net profit recovered by multi-fold YoY after an exceptionally weak 9MFY23. Recall that MEDIAC turned loss- making (core LATAMI: RM16.3m) in 5QFY23 due to broad-based operating weakness.

QoQ recovery derailed. Sequential revenue decline (-5% QoQ), combined with a surge in opex led to the 86% dip in 3QFY24 pretax profit. Nevertheless, bottomline contraction was partially moderated by lower taxes. The plunge in profit despite milder topline contraction was primarily attributed to the OOH and broadcasting (TV and radio) segments.

Puzzling mismatch with industry adex trends. Based on Nielson data, 1QCY24 total industry adex (excluding PayTV) staged a 14% YoY growth. However, it did not translate to corresponding growth in MEDIA’s adex, which declined by 1% YoY. In particular, according to Nielson, we estimate that adex for MEDIA’s key newspapers and TV channels expanded by 15% YoY and 10% YoY, respectively. Given the disconnect, we are concerned that MEDIA is unable to benefit from any future recovery in industry adex.

Digital media keeps innovating. Moreover, intense competitive headwinds linger between traditional and new digital media. The latter’s competitive advantage lies in: (i) structural shift in interest to short video formats and live-stream sales, (ii) application of artificial intelligence (AI) to curate personalized content and commercials, (iii) relatively lower cost per impression, and (iv) interactive digital platforms enable two-way communication and user engagement.

Forecasts. We cut our FY24-25F earnings forecasts by 25% and 8%, respectively, to reflect higher overheads.

Valuations. Correspondingly, our TP is lowered by 7% to RM0.32 (from RM0.34) based on unchanged 10x FY25F PER. Our valuation implies a discount to the average historical forward PER of traditional media players (11x). This reflects expectations of sustained market share erosion for MEDIA due to intense competition from digital media. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We remain cautious on MEDIA due to: (i) sustained erosion of viewership and market share of adex from new digital media, (ii) high fixed costs base amidst topline pressure, and (iii) continued drag from the home shopping segment. Maintain UNDERPERFORM.

Key risks to our call include: (i) recovery in adex for traditional media, (ii) additional cost optimization initiatives drive fixed costs lower, (iii) value accretive M&A, and (iv) successful diversification from its legacy business.

Source: Kenanga Research - 30 May 2024