Media Chinese - Adex to gain momentum next quarter BUY

- We re-affirm our BUY recommendation on Media Chinese International (MCIL), with a lower fair value of RM1.29/share vs. RM1.70/share previously, based on a 10% discount to our DCF value. Our lower fair value is in view of the capital repayment of RM0.41/share which went ex- on 6 November 2012 and was paid on 28 November 2012. 

- MCIL reported a net profit of RM87mil for 1HFY13, after registering RM40mil in 2QFY13. This covers 47% of our estimate. We deem the results to be in-line with expectations and maintain our EPS forecast for now, pending an analyst briefing to be held later. 

- A dividend of 2.05 sen/share was declared, bringing total dividends to 43.05 sen/share, inclusive of the special dividend.

- The weaker 1HFY13 and 2QFY13 were mainly affected by the weakening of ringgit against the US dollar and Canadian dollar. Earnings dipped by 18% QoQ on the back of a 5% decline in revenue. This was primarily attributed to a 63% slip in PBT from the tour segment as travellers prefer to travel in  the early summer to prevent peak season charges. 

- Compared to the preceding quarter, its core business – publishing and printing – was 16% lower in PBT due to:- (1) Negative currency impact; and (2) Rise in staff and operating costs. Meanwhile, Hong Kong operations reported a growth due to active promotions of designer labels and supermarkets, coupled with additional income stemming from the Legislative Council Election. However, we understand that adex in Hong Kong was rather weak in 2Q due to the economic conditions. 

- We expect a better adex momentum in the next quarter backed by the festive period and advertisers’ using up budgets as the year draws to an end. Note that MCIL’s adex grew by a marginal 0.03% in October, suggesting signs of a recovering  adex sentiment.

- At the current level, the stock is trading at a PE of 10x on FY13F earnings, trailing Star’s 15x. This represents a discount of 50% to Star. Our estimates also show that MCIL offers an attractive dividend yield at 5.9% for FY13F after stripping off the special dividend of RM0.41/share, comparable to Star’s 6% and higher than Media Prima’s 4.5% and Astro at 2.4%.

- MCIL is a cheaper proxy in the media sector, anchored by its resilient and dominating position in the Chinese-language newspaper segment with a market share of 89% in the country. This is also supported by a more efficient capital management.

- Key risks to our forecasts are:- (1) Lower-than-expected adex; (2)  Higher-than-expected newsprint cost which rises in tandem with election seasons; and (3) Weakening of the RM against US$.  

Source: AmeSecurities