Media Chinese Int’l - A pleasant special dividend surpriset title

Media Chinese International (“MEDIAC”) has announced a proposed RM700m or RM0.41/share special dividend, which the management is targeting to distribute in 4QCY12. The generous special dividend is a pleasant surprise to us as well as the market given that the group tends to be conservative based on its historical financial track record. Despite the bumper special dividend, management intends to maintain its dividend policy, which is currently set at 30%-60% of PAT. We have reduced our MEDIAC’s FY13-FY14 earnings forecasts by 5.3%-8.1% after imputing higher interest expenses (due to the increase in borrowings) into our financial model. Nevertheless, we have raised our MEDIAC target price to RM1.63 (RM1.33 previously), based on a revised FY13 EPS and a higher targeted forward PER of 15.7x (+2.0 SD). Maintain OUTPERFORM rating.

Proposed RM700m or RM0.41/share special dividend. To facilitate the proposed dividend, MEDIAC proposes to implement a capital reduction, where RM700m (or USD219.8m) credit arising from the company’s share premium account will be reduced and thereafter be credited to a contributed surplus account and applied subsequently for the proposed dividend. The special dividend will be financed by new bank borrowings of approximately RM500.0m (or USD156.9m) and RM200m (or USD62.8m) from internally generated funds. The proposed dividend and capital reduction are subject to the shareholders and/or authorities approvals. Management is targeting the whole exercise to be completed by 4QCY12.

Rationale for the proposal. MEDIAC believes the proposed dividend via new bank borrowings will enhance the company’s capital structure and mix without unduly burdening the group in terms of its cash flow and earnings capability.

Achieved optimal capital structure. We understand that MEDIAC could achieve its optimal capital structure with a net gearing of 0.7x. Therefore, after this debt raising, we believe that any future expansions could only be funded via equity rather than debt instruments. On top of that, we also do not discount that the group may consider disposing its assets should the price be right in the future to reduce its gearing. The achievement of the optimal capital structure has also boosted the group’s FY13 ROE to 25.7% as opposed to 13.7% previously.

We have reduced our FY13 and FY14 earnings forecasts by 5.3% and 8.1% to RM175m and RM171m, respectively after imputing a higher interest expense from the new borrowings. The group’s FY13 NTA/share is also expected to fall to RM0.27 from RM0.66 previously while its gearing ratio are expected to rise from almost zero to 0.7x.

Our target price has been raised to RM1.63 nonetheless, based on a revised FY13 EPS and a higher targeted forward PER of 15.7x (+2SD) vs. 12.2x (+1SD) previously. Our higher targeted PER is justified given that the market currently prefers high dividend yield stocks that have a stable operational environment. Thus, MEDIAC’s total FY13 dividend per share of 45.4 sen, which translate into a 33.6% dividend yield, and its leading position in the Malaysian Chinese media segment is certainly fits the bill. Downside risks in the stock are 1) any unfavourable operational environment and adex outlook and 2) an unexpected lower dividend payout ratio.

Source: Kenanga