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Wednesday, October 24, 2012

AMEDIA - Concern Remains, But Fundamental is Intact (TA)

Upgrade to Hold on Valuation Ground We upgrade Asia Media Group Bhd (AMGB) to Hold from Sell previously despite lowering target price to RM0.27 (after full dilution of warrants only) on the back of a 13.5% and 21.0% reduction to our FY12 and FY13 profit estimates .The earnings revisions take into account: 1) lower ad rates by 17.2% and 12.5% to 4,000 and 3,000 (in FY13) for its KL and Johor air time compared to as previously guided, 2) a more prudent air time utilisation rate for both years, and 3) higher cost derived from its programme sponsorship segment.

Nevertheless, the change in our call is mainly driven by lower risk-reward at the current PER of just 3x – an all time low for the stock. Our revised numbers takes into consideration a more prudent outlook with the recent lackluster listing of Astro. Our target PER on the stock remains unchanged at 5x – thus giving us a TP of RM0.27. However, to recap, AMGB undertook an exercise of a proposed bonus issue and free warrants on the 5th of this month. On a fully diluted basis this would translate to RM0.18 (after considering interest income at an indicative exercise price of RM0.51).

Recent Events are Cause of Concern but Fundamental is Intact Two factors to consider: 1) recent sharp volatility in the share price that would negatively affects investors’ sentiment, and 2) major shareholder, reducing his stake in the company. The share price surged from March to a peak of RM1.14 on Sept 27, but subsequently plunged as much as 72% within a span of 3 weeks. Admittedly, this volatility would call into question efficient pricing mechanism of the stock.

The major shareholder, the CEO of AMGB, Datuk Ricky Wong, pared down his stake in the company from 41.5% to 30% last Friday, undermining investors’ confidence in the stock. At this juncture, we were unable to clarify with him on the movement of the stake. However, we suspect that the sell down may have been due to force selling. This is due to the fact company owners seldom reduce their stake below the crucial 33% threshold, after which any further changes in shareholding may inevitably trigger an MGO. As a comfort though, we note that according to a filing on Bursa on Oct 19, Datuk Ricky Wong had acquired 6.8mn shares, or 2.7% of the total share capital to strengthen his holdings in AMGB.

That said, despite concerns stemming from these several major unwarranted events, we stress that it is business as usual for the company. Even after the slight revision to our earnings, we still expect FY11-FY15 earnings to grow by a CAGR of 29.7%.

What are the Risk Factors? We would not discount the risk that investors could take a wait and see approach before confidence to invest returns. In addition, there is also possibility, although we believe is remote, that the sharp movement in the share price might attract regulatory scrutiny in the immediate term. Hence, for those investors with high risk appetite, we view the current valuation as a good entry point. Our channel checks indicate the company is still vying for a transfer to the Main Board, which should improve the investing merit on the stock in the long term.

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