Media sector to see adex recovery in 2010

Written by The Edge Financial Daily Thursday, 18 February 2010 11:07

Upgrade to trading buy: We are turning more optimistic on the media sector in light of the sustainable recovery of industry advertising volume. The improving economic outlook is likely to aid a recovery in sentiment among advertisers, which will improve the visibility of advertisement spend in 2010 as advertisers kept commitments on a short leash in 2009. We think that the downside risks for advertisement volume are minimal given the favourable economic outlook and two external sporting events this year. We continue to project 7% advertisement expenditure (adex) growth for 2010 while noting the upside potential to this estimate. In view of the favourable industry prospects, we upgrade the sector from neutral to trading buy. For exposure, we recommend the industry laggards, Media Chinese International Ltd and Star Publications (M) Bhd, which are upgraded to trading buy, with support coming from attractive dividend yields of over 6%. Total gross adex notched up a 7.4% growth in 2009, surpassing industry expectations of 5%-8% contraction and our projected decline of 6.2%. Advertising spending in 4Q09 was surprisingly strong as the pick-up seen in 3Q09 followed through in 4Q. The recovery of adex should spill over to 2010. Although 1H is traditionally a weaker period for adex, we think that there is little risk of a pullback in adspend in 1H10 similar to the trend seen in 1H09. We make no changes to our 2010 adex growth projection of 7% which reflects the impact of the FIFA World Cup in June 2010 and the Commonwealth Games in 2H10. This implies an adex-GDP growth multiplier of two times, which is higher than the average 1.6 times seen during the past three FIFA World Cups. The recovery of total newspaper adex is still early in the curve. Although the domination of the Malay language segment should persist given the favourable demographics, the recovery of total industry volume should lead to a further decline in the rate of contraction for the English and Chinese language segments. We view this as a sign that the worst is over for these two segments. We were too pessimistic in our adex outlook towards the later part of 2009 and underappreciated the early recovery in advertisers sentiment. However, investors can still get exposure to the favourable industry fundamentals through the laggards in the sector. We upgrade Media Chinese International from neutral to trading buy with a higher target price of 75 sen, pegged to a higher CY11 price-to-earnings ratio (PER) of 15 times from 13.5 times perviously. The groups earnings are likely to surprise on the upside with sustainable higher dividends to boot. Our revised dividend per share (DPS) gives a solid dividend yield of 6%. We also raise Star Publications from neutral to trading buy. Our target price is increased to RM4.10 as we apply a higher CY11 PE of 15 times instead of 13.5 times. CIMB Research, Feb 17

MMCs Senai High Tech Park gears up for action MMC Corporation Bhd (Feb 17, RM2.41) Maintain trading buy at RM2.41, target price at RM2.95: MMC surprisingly announced that Senai High Tech Park has signed two memoranda of understanding (MoU) for its first tenants. However, as only 30 out of a total 2,718 acres are tentatively being leased, we maintain our numbers.

Senai High Tech Park Sdn Bhd, a wholly owned subsidiary, had signed two MoU with EQ Solar Technology International Sdn Bhd and MOX-Linde Gases Sdn Bhd. EQ Solar intends to utilise a 25-acre site for a manufacturing facility to produce monocrystalline and polycrystalline solar modules whilst MOX -Linde will set up an integrated industrial gas manufacturing and separation plant and electronics specialty gases warehouse on five acres. We believe long-term leases were signed with EQ Solar and MOX-Linde, paying up to RM25 per sq ft. The signing of these MoU is the first for leasing of land in the park since MMC bought Senai Airport Terminal Services SB (SATS) in 2008. Being the second high tech park in Malaysia after Kulim Hi-Tech Park, MMC has high hopes for the park, with expectations for RM20 to RM30 per sq ft leases compared with our internal valuation of RM7.50 per sq ft. If the park, with a total of 118.4 million sq ft, can cont inue to attract value-adding investors, the contribution from future leases as well as the demand for air and land cargo from the industries in the park could be substantial. For now, although these two MoU could translate into a revenue of RM32.7million, this is still less than 0.5% of our projected revenue for MMC. Thus we leave our forecasts as well as our overall average valuation of RM7.50 per sq ft of SATS land unchanged. EQ Solar, which is investing some US$500 million (RM1.7 billion) in a manufacturing facility producing 50MW a year of crystalline modules for solar cells, joins other solar-related companies that have set up shop in Malaysia to take advantage of the governments RM1.5 billion Green Technology Financing Scheme. We expect to see more of such green technology industries in Senai as MOX-Lindes RM60 million investment is aimed at supplying industrial gases to other tenants there. We view this piece of news positively despite our unchanged forecast as we had not expected any land leases in Senai for at least three to five years, based on our experience with the Seaport Worldwide Land in Tanjung Bin. OSK Research, Feb 17

Traffic flows smoothly for Litrak Lingkaran Trans Kota Holdings Bhd (Litrak) (Feb 17, RM2.93) Maintain buy at RM2.89, target price at RM3.55: We maintain our buy call on Litrak for its good 5.5% net dividend yield potential and 22% upside to our RM3.55 discounted cash flow-based target price. Traffic growth remains unfazed at both the Lebuhraya Damansara-Puchong (LDP) and Sprint, thus generating strong cash flows for shareholders returns. The RM300 million capital expenditure (capex) programme to improve traffic flow at the LDP has started, which will be a long-term positive to sustain growth. Traffic at the LDP is growing at slightly more than 2% per annum, within our estimates of 2% growth for the financial year ending March 31, 2010. Current average daily traffic (ADT) is estimated at 430,000 vehicles, above 2007s pre-toll hike level of 420,000. Traffic suffered a dip to 415,000 in 2007 after a 60% (60 sen) toll hike to RM1.60 (Class 1) in January 2007, but recovered to 420,000 in 2008. Elsewhere, Sprints weekday volume has reached 190,000 vehicles daily versus 180,000 a year ago. Rapid growth was registered at the Penchala (up 27% year-on-year) and Kerinchi Link (up 13% y-o-y), offsetting the stagnation at the Damansara Link. Toll decisions by end-1Q10 refer to Sprints Kerinchi and Damansara Link where a toll revision has been deferred since 2008, and the Penchala Link which was due in Jan 2010. The scheduled revisions are an increase of RM1.00 for a Class 1 vehicle at the Kerinchi Link (up 66%) and Penchala Link (up 50%), and a hike of 50 sen at Damansara Link (up 50%).

We retain our 2% FY11 traffic growth forecast for Sprint, as it faces higher price elasticity than the LDP amid available alternative routes. The LDP is scheduled for a 31% toll hike only in 2011 (up 50 sen for Class 1). Meanwhile, the governments decision on a likely revision to the countrys toll rate structure may also be known by end-March. We forecast FY10 net profit to contract by 16% y-o-y due to higher interest costs and maintenance expenses. Nonetheless, growth should resume in FY11, which would incorporate part of the LDPs toll hike in Jan 2011. We also retain our dividend per share (DPS) assumption of 16 sen per annum pending the completion of capex works at the LDP. Litrak is capable of paying higher dividends when the works near completion. Maybank IB, Feb 17