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Media Prima Berhad

Date: 30 July 2012

Deserves more airtime

MPR continues to be the dominant leader in its niches namely FTA TV, Malay newspaper and outdoor advertising. While TV can be volatile, the newspaper segment should continue to grow on the back of Harian Metro popularity. More importantly, there is ample room to increase dividend as payout ratio is only 50% and balance sheet has no net leverage. Even at last year DPS of 9 sen (46% payout), MPR is already yielding 3.75% at current price. If payout ratio is increased to 80%, DPS will increase to 16 sen or 6.7% yield. In fact, technically net DPS for 2011 was 17 sen or a yield of 7.1% at current price. Furthermore, we have not imputed balance sheet management potential similar to those recently exercised by MCIL and STAR. This is an opportunity to accumulate a market leader at an attractive price. Based on DDM, we derived a fair value of RM2.80 for MPR. We have also assigned a High conviction rating to MPR. Overall, we have a BUY on MPR.

Buy
Fair value Previous FV Share price Yield Capital gain Total return Conviction Stock code Market cap RM2.80 N/A RM2.40 +6.7% +17% +24% High MPR MK RM2,589m

John LEE
john@nonameresearch.com

nonameresearch.com | 30 July 2012

Clear Market Leader

TV and print key driver of bottomline
85% of revenue from TV and print. TV continues to be the dominant revenue contributor for MPR. Subsequent to the full acquisition of NSTP in October 2009, both TV and print contributes circa RM700m (40% to revenue) each or 85% of total revenue of RM1.6bn. As befitting a media company, advertisement contributes the lion share of revenue at 81%. Circulation revenue is second at 17%.
Figure 1: MPR revenue breakdown 2011

Source: MPR

TV losing Malay viewers to Astro but revenue continues growing. Historically TV has been MPR main revenue segment as MPR began life by acquiring TV3 back in 2003. Over time, MPR TV stations started to lose Malay viewers to Astro, the pay TV monopoly. MPR viewership share declined from 52% in 2005 to 47% in 2010. In contrast, over the same period, Astro increased its viewership from 28% in 2005 to 38% in 2010. Yet, despite declining viewership, revenue for all TV stations continued to grow (at around 5% per annum). Furthermore, TV is still the key segment for MPR, generating RM200m or 59% of RM340m EBIT in 2011. TV is also the source of MPR earnings volatility as the cost of running TV stations is more or less fixed implying that profitability is determined more by adex behaviour rather than cost control.
Figure 2: MPR EBIT before corporate expense 2011

Source: MPR

nonameresearch.com | 30 July 2012

Print driven by Harian Metro stellar growth. Total print revenue grew by a strong 15% in 2010 to RM670m on the back of spectacular growth by Harian Metro. Growth throttled in 2011 as revenue grew only 4% to RM700m in 2011. However, this should only be a pause in growth as Harian Metro growth story is still intact. Harian Metro grew at rate of between 20%-30% per annum between 2007 and 2010. Such strong growth resulted in a doubling of Harian Metro revenue from RM170m in 2007 to RM342m in 2010. Harian Metro contribution to total revenue increased from 32% in 2007 to 51% in 2010. Growth in Harian Metro helped offset decline in the other publications. Berita Harian and NST revenue declined by 10% and 7% respectively between 2007 and 2010. Segmentally, contribution to bottomline from print still has room for improvement. Both TV and print generate the same amount of revenue at RM700m each. But at the EBIT level, print generates a weak RM70m only compared to TV RM200m.

Outdoor and radio contribution still limited

Outdoor exhibit steady growth but contribution still limited. Both outdoor and radio have the highest EBITDA margins in the MPR portfolio at 39% and 46% respectively. Due to growth through acquisitions, both segments have doubled in size between 2007-2010. Outdoor revenue has increased from RM64m in 2007 to RM134m in 2010 while radio revenue has increased from RM31m in 2007 to RM63m in 2010. However, these two segments still only contribute 12% to EBIT and hence are still subservient to TV and print.
Figure 3: MPR revenue by segment 2007-2011
800 700 600 500 559 655 800 700

690

700 600 500

670

592

546
RM m

RM m

400

400

300 200
100 -

300 200
100

2008 2009
Print media

2007

2008
TV

2009

2010

2011

2007

2010

2011

160 140 120 98

70
144 130 96
RM m

63 59
53 42 31

60

50
40 30 20

100

RM m

80

64

60 40
20 -

10
2007 2008 2009
Outdoor

2010

2011

2007

2008

2009
Radio

2010

2011

Source: MPR

nonameresearch.com | 30 July 2012

More Upside from Harian Metro Growth?

Rapid rise of Harian Metro
Circulation growing at CAGR 14%. Harian Metro has been experiencing very rapid growth of 14% per annum for close to a decade already. Circulation was growing at 24% per annum during the early years of 2003-2005 before moderating to low teens in 2010. Harian Metro currently has a circulation of 387,000 copies per day
Figure 4: Harian Metro circulation growth

Source: Audit Bureau of Circulation

Readership growing even faster at 20%. Rising circulation begets rising readership. Compared to circulation growth of low teens, we estimate that readership has been growing at almost twice that rate at 20%. At around 3 million readers, Harian Metro has the highest readership in Malaysia. Comparatively, Star has 1 million readers and MCIL flagship Sin Chew has 1.2 millon readers. Consequently, adex growing at 30%. Due to rising circulation and readership, Harian Metro adex has been growing 30% per annum. On its own, Harian Metro contributes 50% or print segment revenue and 20% of MPR revenue.

Ample room for growth from Harian Metro

Room for adex to circulation. Despite Harian Metro rapid growth to date, there is still further room for growth. The print segment as a whole has an adex to circulation ratio of 1.3x, lower than MCIL at 1.5x and Star 4x. Moreover, Harian Metro adex to circulation is still too low at only 0.9x. Comparatively, Berita Harian is at 1.7x and NST is at 2.3x. Considering its status as the leading Malay daily, Harian Metro adex to circulation ratio should be between 2x -4x. Therefore, adex should continue to grow for Harian Metro. Management guiding 15%-20% growth for Harian Metro. MPR introduced a 19% rate hike for Harian Metro effective 1 March 2011. Still, management believes ad rates could be increased by 15%-20% annually for next three years. Management target adex to circulation ratio of 1.5x by 2012 and believes this target is achievable due to limited Malay content elsewhere. In contrast, English content is readily available online.

nonameresearch.com | 30 July 2012

MPR Dividend Capacity Underestimated

MPR already yielding 7%. MPR has ample room to increase dividend. Historically, MPR has maintained a payout ratio of less than 50%. Last year, MPR paid out 9 sen DPS or 46% of 20 sen EPS. This translates to a 3.75% yield at current price of RM2.40. Even just assuming an increase in payout ratio to 80%, DPS will increase to 16 sen or 6.7% yield at current price. We believe that management will increase payout ratio to closer to 80% in line with other media companies. In fact, technically, MPR already did so with an additional single tier second interim of 3 sen and a special single tier dividend of 5 sen for FY2011 (both declared Nov 2011) which brought total net DPS for 2011 to 17 sen or a yield of 7.1% at current price.
Table 1: MPR DPS 2010-2011 RM m 55 40 2010 Net DPS 5.2 3.8 RM m 63 32 32 53 2011 Net DPS 6.0 3.0 3.0 5.0 17.0

Final single tier dividend for previous year First interim single tier dividend Second interim single tier dividend Special single tier dividend Total DPS sen
Source: MPR

9.0

In addition to that, MPR balance sheet is currently healthy with no net leverage. While have not imputed any balance sheet management, there is room for management to leverage up the balance sheet as per MCIL and STAR and pay out a special dividend.

nonameresearch.com | 30 July 2012

Valuation and Conclusion

Valuation method and key assumption
Based on DDM, we derived a fair value of RM2.80 for MPR. At current price of RM2.40, this represents a potential total return of 24% comprising 6.7% dividend yield and 17% capital gain. MPR should be able to generate circa RM250m or 211 sen in FCF per year Net DPS at close to 16 sen for 2012

Key risks
Decline in TV. TV represents the most volatile component of MPR revenue both in the short term and in the long term. In the short term, TV adex is susceptible to macroeconomic developments. A sudden negative development could affect advertisers sentiment. In the long term, TV adex has in the past exhibited secular growth. However, structural changes is also currently taking place in this segment as TV changes from broadcast TV to internet TV. This could hamper TV revenue growth or even initiate a decline.

Conclusion
MPR continues to be the dominant leader in its niches namely FTA TV, Malay newspaper and outdoor advertising. While TV can be volatile, the newspaper segment should continue to grow on the back of Harian Metro popularity. More importantly, there is ample room to increase dividend as payout ratio is only 50% and balance sheet has no net leverage. Even at last year DPS of 9 sen (46% payout), MPR is already yielding 3.75% at current price. If payout ratio is increased to 80%, DPS will increase to 16 sen or 6.7% yield. In fact, technically net DPS for 2011 was 17 sen or a yield of 7.1% at current price. Furthermore, we have not imputed balance sheet management potential similar to those recently exercised by MCIL and STAR. This is an opportunity to accumulate a market leader at an attractive price. Based on DDM, we derived a fair value of RM2.80 for MPR. We have also assigned a High conviction rating to MPR. Overall, we have a BUY on MPR.

diluted

nonameresearch.com | 30 July 2012

Historical Statistics
Revenue and Net Income (FYE-Dec) Payout Ratio (FYE-Dec)

Net Income Margin (FYE-Dec)

EPS and DPS (FYE-Dec)

Revenue by Segment 2011 (FYE-Dec)

Revenue by Type 2011 (FYE-Dec)

nonameresearch.com | 30 July 2012 Rating structure The rating structure consists of two main elements; fair value and conviction rating. The fair value reflects the security intrinsic value and is derived based on fundamental analysis. The conviction rating reflects uncertainty associated with the security fair value and is derived based on broad factors such as underlying business risks, contingent events and other variables. Both the fair value and conviction rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.