MEDIAC is mulling additional cost optimization measures, and evaluating ways to navigate the new AI era. Additionally, in terms of financial performance, it is hopeful that the worst is over. Hence, it is optimistic of improved financial results after incurring losses in FY23- 24. We maintain our forecasts, TP of RM0.11 and UNDERPERFORM call.

Staying relevant in the AI era. To navigate the generative artificial- intelligence (AI) era, MEDIAC is hopeful that it could monetize its intellectual property or news content in future. The optimism is driven by recent developments, including a content-licensing pact struck between News Corp and OpenAI last week. According to media sources, this deal could be worth more than USD250m over five years, where News Corp could be compensated in cash and credits for use of OpenAI technology. Nearer to home, MEDIAC is collaborating with local publishers via the Malaysian Newspapers Publishing Association to collectively approach and engage multinational AI companies on this matter. Nevertheless, given its niche in Chinese language content, MEDIAC is more sanguine of reaching commercial agreements with emerging AI players in China such as Baidu, Tencent etc.

Leveraging on AI tools. MEDIAC is exploring ways to integrate AI into its operations. Hence, the group is evaluating AI tools that streamline content distribution. These tools enable publication of news articles on multi digital platforms within minutes in a single click. Concurrently, these AI tools can also generate accompanying videos, and render digital human presenters to narrate news content. Based on the efficiency gains offered by AI, MEDIAC estimates that at least 30% of its staff could be laid off within two years following the adoption of AI. On the back of this, MEDIAC has initiated internal training for its staff to equip them with the necessary skills to effectively utilize AI tools.

Restructuring to manage costs. Meanwhile, pending the AI transition, MEDIAC believes it can extract significant cost savings by downsizing its work force and encouraging its employees to multitask. As part of its ongoing restructuring, MEDIAC estimates that its workforce may potentially be reduced from 1,800 to circa 1,000 employees in future. To recap, manpower comprises the most significant cost driver for MEDIAC, accounting for c. 50% of costs, followed by newsprint (c.20%). On top of that, if unit publishing costs increase further in future, MEDIAC may shutter its printing plants at Johor and Penang. Thereafter, it would centralize print operations at its plant in Petaling Jaya, Selangor.

New ad platform to patch up adex hole. To recap, MEDIAC experienced significant erosion in programmatic advertising income in FY24 due to a decline in digital traffic across the group’s websites. This resulted from changes in Facebook’s news feed algorithm, which led to fewer readers being directed to MEDIAC’s sites. Nevertheless, MEDIAC is hopeful that it can partially offset this loss in digital adex via the launch of MCIL Ad Manager, a self-serve ad platform offering lower prices to attract small and medium-sized advertisers.

Hopeful the worst is behind. Moving forward, MEDIAC is optimistic that the worst is over in terms of financial performance. This is underpinned by: (i) cover price hikes for its key publications since 4QCY24, (ii) improved profit traction at its travel segment, (iii) stabilized newsprint costs at c. USD600/MT, (iv) reduction in depreciation and amortization (D&A) costs, (v) increased advertisement placements (e.g. congratulatory notices) for Sin Chew Jit Poh’s 95th anniversary celebrations, and (vi) launch of MCIL ad manager. Meanwhile, lower D&A is seen from recent asset write-downs in 4QFY24 for: (i) MEDIAC’s smaller printing plants, and (ii) mast heads of its major publications. Therefore, whilst the declining trend in circulation is expected to prevail, MEDIAC is hopeful of improved earnings in FY24.

Travel the only bright spot. MEDIAC is fairly confident of sustained earnings traction for its travel business in FY25. This is anchored by: (i) continued high demand for outbound premium tours from Hong Kong to China, and (ii) robust uptake for tours to America. Moreover, there is potential upside from increased tours to Europe. To recap, at this juncture, MEDIAC is holding back on offering tours to Europe due to prohibitively expensive flight tickets. Nevertheless, MEDIAC believes that pricing will rationalize over the medium-to-long term as flight frequencies ramp up.

Forecasts. Maintained.

Valuations. We also keep our TP of RM0.11 based on 0.3x FY25F P/NTA, which implies a discount of 40% versus the sector’s (excluding ASTRO) historical average of 0.5x forward P/NTA. This is to reflect expectations of sustained losses in the near-to-medium term, as well as its smaller market cap relative to peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 5).

Investment case. We remain cautious on MEDIAC due to: (i) sustained adex market share erosion, (ii) margin pressure from heightened fixed costs amidst topline weakness, and (iii) fierce competition from digital media given their competitive advantages (e.g. application of artificial intelligence, low barriers of entry, lean cost base).

Key risks to our call include: (i) recovery in adex for traditional Chinese newspapers, (ii) sustained traction in cost cutting initiatives drive fixed costs lower, and (iii) successful inroads into new digital media or synergistic businesses to diversify from legacy earnings.

Source: Kenanga Research - 30 May 2024