Utusan Melayu (Malaysia)

Recommendation: HOLD

Stock Code: 5754 Bloomberg: UTUS MK Price: MYR1.05 12-Month Target Price: MYR1.13 Date: February 28, 2006

Board: Main Price Vol ('000) Sector: Trading/Services (M YR) 12,000 Volume GICS : Consumer Discretionary / Publishing Price 30 Day M oving Average 2.00 Market Capitalization: MYR114.7 mln 9,000

Summary: Listed in 1994, Utusan Melayu (Malaysia) (Utusan) is engaged in printing, publishing and advertising businesses in Malaysia. It publishes 6,000 popular Malay newspapers such as Utusan Malaysia 1.00 and Mingguan Malaysia as well as magazines like Mastika, Mangga, Wanita and URTV. 3,000

Analyst: Joy Lee, CFA 0.00 0 Jan-03 Oct-03 Jul-04 M ay-05 Feb-06

Highlights Recommendation

• Due to higher newsprint costs , 2006 will be a difficult year with • We initiate coverage on Utusan Melayu with a Hold recommendation depressed margins. We expect Utusan to register a 34.0% fall in its and a 12-month target price of MYR1.13 per share. bottom-line this year. The decline would be even steeper if not for lower taxation due to reinvestment allowances. Earnings should pick up in • Our target price is based on target 2007 EV/EBITDA of 5.5x and 2007 given our projections of a more moderate increase in newsprint P/NTA of 0.7x, which are in line with Utusan’s historical averages. costs and steady growth of advertising and circulation revenue. • The stock hit a low of MYR1.00 earlier this year, which in our view is a • Utusan has been trading at a discount to its peers and we do not see reflection of the group’s unexciting outlook. However, we believe that any reason for a re-rating in the near-term given rising newsprint costs current valuations have discounted the negative expectations and

and a competitive environment. The stock is currently trading at a 2007 further downside is limited. EV/EBITDA of 6.1x compared with the industry average of around 9.5x

EV/EBITDA. • We forecast a 48.9% YoY decline in pretax profit to MYR11.2 mln on

revenue of MYR398.3 mln in 2006 due to higher newsprint cost. With

lower tax expense from reinvestment allowances, we project net profit Investment Risks to decline by 34.0% YoY.

• In 2007, we expect a 17.8% YoY recovery in net profit to M YR11.8 • Key investment risks for the stock include higher-than-expected mln on revenue of MYR422.9 mln, as steady growth in circulation and newsprint costs and weaker-than-expected revenue from circulation and advertising revenue will offset the more moderate increase in advertising. newsprint cost.

• The stock is not very actively traded, with average daily trading volume • Utusan has set aside MYR62 mln for printing plant construction. We of around 11,000 shares over the past six months. expect the company’s payout ratio to remain low at around 20% in 2006 and 2007. Key Stock Statistics Per Share Data FY Dec. 2005 2006F FY Dec. 2003 2004 2005 2006F EPS (sen) 13.8 9.1 Book Value (MYR) 1.79 1.89 2.01 2.08 PER (x) 7.6 11.5 Cash Flow (sen) 34.1 33.4 35.3 31.0 Dividend/Share (sen) 2.5 2.0 Earnings (sen) 9.0 11.4 13.8 9.1 NTA/Share (MYR) 2.01 2.08 Dividend (sen) 2.0 2.5 2.5 2.0 Book Value/Share (MYR) 2.01 2.08 Payout Ratio (%) 26.0 21.9 18.1 21.9 Issued Capital (mln shares) 109.2 PER (x) 11.6 9.2 7.6 11.5 52-week Share Price Range (MYR) 0.99 – 1.31 P/Cash Flow (x) 3.1 3.1 3.0 3.4 Major Shareholders: % P/Book Value (x) 0.6 0.6 0.5 0.5 UMNO 50.5 Dividend Yield (%) 1.9 2.4 2.4 1.9 Nilam Setar (M) Sdn Bhd 15.0 ROE (%) 5.3 6.2 7.1 4.5 Net Gearing (%) 51.9 59.3 68.8 72.7

All required disclosures appear on the last page of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission. Copyright © 2006 The McGraw-Hill Companies, Inc. Page 1 of 5

Utusan Melayu (Malaysia)

Recommendation: HOLD

Stock Code: 5754 Bloomberg: UTUS MK Price: MYR1.05 12-Month Target Price: MYR1.13 Date: February 28, 2006

Background usage, the group offers mobile phone-related products such as messaging and ringtone-downloading services. Corporate Profile Utusan Melayu (Malaysia) Berhad (Utusan) was incorporated as a public The bulk of Utusan’s earnings are derived from newspaper publishing. limited company in 1967, and was listed on the Main Board of Bursa There are two Malay newspaper publishers in Peninsular Malaysia, Malaysia in 1994. The group is mainly engaged in the publishing namely Utusan and The New Straits Times Press (NST) (NST MK, Not business, printing and distributing newspapers, magazines, and books. Ranked), which publishes two Malay dailies, Berita Harian and Harian Metro. The board consists of nine members, including three executive directors (including the chairman), four independent non-executive directors, one NST’s Malay daily newspaper circulation has risen steadily since 2000 senior independent non-executive director and one non-independent non- (+12.6% CAGR to Jun. 2005 based on Audit Bureau of Circulations executive director. The composition of the board is in the best practice of Malaysia (ABCM) data) thanks to the success of its tabloid Harian Metro. corporate governance with independent directors outnumbering non- Utusan’s circulation has remained relatively flat over the same period independent directors. Former Malaysian National News Agency resulting in a loss of market share to NST from 48% in the 12 months to (BERNAMA) editor-in-chief, Tan Sri Mohamed Hashim Ahmad Jun. 2000 to 33% in the 12 months to Jun. 2005. The data excludes Makaruddin is the executive chairman, while Mohd Nasir Ali, ex- executive Utusan’s tabloid KOSMO!, which was launched in Aug. 2004, but we director/CEO at Kuala Lumpur City Securities, is the group executive estimate that even including KOSMO!, Utusan’s market share would have director. slid to about 37% in the 12 months to Jun. 2005.

Malaysia’s ruling political party, United Malays National Organization, or Malay Newspaper Circulation in Peninsular Malaysia (1999-2005) UMNO, owns 50.5% of Utusan. The group’s other major shareholders include privately held Nilam Setar Sdn. Bhd. (15.0%), and the Ministry of 500,000 Finance, Malaysia (6.9%). 450,000 400,000 Corporate Structure 350,000

Utusan Melayu 300,000 (Malaysia) 250,000 Average Daily Circulation 200,000 Utusan Publications 100% 100% PT. Sinar Media 1999 2000 2001 2002 2003 2004 2005 and Distributors Advertising Year

100% 80% Utusan Printcorp PT. MitraCipta NST group Utusan Melay u group InterNusa

100% 100% Source: Audit Bureau of Circulations Malaysia Utusan Karya Perfisio Solutions

Growth in Malay newspaper circulation, though the fastest among the 100% 100% Utusan Binders VNR Media three major groups of newspapers (English, Malay, Chinese), has Technologies moderated in recent years with rising competition from other forms of 100% 100% media such as the Internet. Malay newspaper circulation growth in Juasa Holdings Utusan Events Manag ement Peninsular Malaysia moderated to 4% in 2005, from 6.3% in 2004, 4.7% in 2003 and 11.8% in 2002 (based on 12 months to Jun. data). 100% 100% Utusan Media Sales Net Space Learning Utusan Malaysia Utusan Malaysia, a broadsheet newspaper, is one of the most popular 100% 100% UPD Utusan Sight & Sound Malay newspapers in the country. It led the Malay dailies in terms of circulation prior to 2005. Its average daily circulation slipped 7.4% YoY to 100% 100% Utusan Sinar Media U-Print 228,802 copies for the 12 months to Jun. 2005 based on ABCM data. With the decline, NST’s Berita Harian and Harian Metro circulation numbers (231,163 and 229,829 copies, respectively) are slightly ahead of Utusan Malaysia. Source: Company data

To counter rising newsprint costs, the group raised the cover price of Business Utusan Malaysia to MYR1.50 per copy from MYR1.20 in Jan. 2005, which Utusan Melayu is a publishing company. It publishes Bahasa Malaysia we believe should effectively enhance the group’s circulation revenue. (Malay) newspapers such as Utusan Malaysia and Mingguan Malaysia, and publishes CD-ROMs, books and magazines. Popular magazines Mingguan Malaysia published by the group include Wanita (a monthly women’s magazine), This newspaper is published every Sunday, and is the best selling Malay Mangga (a monthly comic-entertainment magazine targeting young Sunday newspapers, with 529,176 copies in average daily circulation for readers), URTV (a bi-monthly entertainment magazine) and Mastika (a the 12 months to Jun. 2005 (based on ABCM data). Competitor Berita monthly general interest magazine). Utusan also provides online news Minggu (published by NST) trails far behind in the second position with and information, with portals such as Utusan Online and Utusan circulation of 358,054 copies. Despite being the best-selling Sunday Education Portal. In view of the increasing popularity of mobile phone

Utusan Melayu (Malaysia)

Recommendation: HOLD

Stock Code: 5754 Bloomberg: UTUS MK Price: MYR1.05 12-Month Target Price: MYR1.13 Date: February 28, 2006

Malay newspaper, Mingguan Malaysia has seen circulation declining (- In 2007, we expect a 17.8% YoY recovery in net profit to MYR11.8 mln on 5.8% in 2005; -1.6% in 2004), while NST’s Metro Ahad is growing at revenue of MYR422.9 mln, as steady growth in circulation and advertising double-digit rates. Like Utusan Malaysia, the group raised the cover price revenue will offset the more moderate increase in newsprint cost. of Mingguan Malaysia to MYR2.00 per copy from MYR1.50 in Jan. 2005 to counter higher newsprint costs. Utusan has set aside MYR62 mln for construction of a new printing plant in Penang, which is expected to be fully operational in mid-2006. Given KOSMO! the capex plan and the group’s gearing, we expect dividend payout to The group introduced its first compact-sized Malay newspaper, KOSMO! remain relatively low at around 20% in 2006 and 2007. on Aug. 30, 2004 in the Klang Valley. The newspaper is aimed at younger readers. In Jan. 2005, the group introduced the Sunday edition, KOSMO! Valuation Ahad, to the Klang Valley market and by Mar. 2005, KOSMO! Ahad was made available to other parts of Peninsular Malaysia. According to management, KOSMO!’s average daily circulation reached 40,000 in late The stock is trading at a 2007 EV/EBITDA of 6.1x, which is below that of 2005. At a cover price of MYR0.80, KOSMO! is the cheapest among the its local peers at around 9.5x EV/EBITDA. We believe the stock’s Malay dailies. valuation is a reflection of the group’s unexciting earnings outlook and mild dividend yield. In addition, the group’s net gearing of 68.8% as at end We believe Utusan made the right strategic move with the introduction of Dec. 2005 may be a drag on the stock, in our view. KOSMO!, given the increasing preference for tabloid newspapers and the fact that the younger generation will be an important driver of adex in the We recommend a Hold on the stock with a 12-month target price of future. However, competitor Harian Metro already has a strong foothold in MYR1.13. Our target price is based on target 2007 EV/EBITDA of 5.5x the market and it will take time for KOSMO! to establish a meaningful and P/NTA of 0.7x, which are in line with Utusan’s historical averages. presence in the market. Management targets for KOSMO! to breakeven in Utusan has been trading at a discount to its peers and we do not see any two to three years. impetus for a re-rating in the near term given the more challenging operating environment, such as rising newsprint costs and declining Other businesses market share. Utusan is also engaged in printing as well as information technology and multimedia businesses. In particular, the information technology and multimedia segment started to contribute around 0.6% to the group’s Comparative Valuation operating profit in 2004, from losses in previous years. Though the scale UTUSAN * SCM NST *NAN of these businesses are small compared to the publishing business, given Share Price (MYR) @Feb. 24, 06 1.04 3.06 2.27 3.98 time we believe Utusan should benefit from diversification into other forms Mkt. Cap (MYR mln) 113.6 924.1 493.1 308.2 of media such as the internet, which not only create new sources of income but also reduces the group’s sensitivity to newsprint costs. Ave. Daily Vol. (’000) 11.6 75.4 95.9 2.4 PER FY04 (x) 9.1 16.1 231.6 20.4 Earnings Outlook PER FY05 (x) 7.5 14.3 39.7 28.0 P/NTA 0.6 3.8 0.5 2.0 The publishing, distribution and advertisement division is the key earnings Yield (%) 1.3 2.8 1.6 0.7 driver of the group. Contributions from other divisions are insignificant. *SCM: FY04 (Mar.) and FY05 (Mar.); NAN: FY04 (Jun.) and FY05 (Jun.) Note: Sin Chew Media (SCM MK, Not Ranked); New Straits Times Press (NST MK, In 2006, we expect newspaper circulation revenue to rise 3.8% YoY to Not Ranked); Nanyang Press Holdings (NAN MK, Sell) MYR161 mln with strong circulation growth for KOSMO!. In 2007, we Source: Bloomberg, Company data believe the growth will stabilize to around 2%. Relative Share Price Performance of Comparables We project advertising revenue to grow at 8% in 2006, boosted by higher advertising demand with the World Cup in mid-2006 and the Asian Games % in late 2006. The growth rate is expected to moderate to 6% in the 75 following year. 60 45 Newsprint accounts for about 25% of total cost. We expect newsprint cost 30 to surge 15% in 2006 and up by another 4.5% to in 2007 on the back of 15 rising newsprint prices and higher newsprint consumption from KOSMO!. 0 With the increase in newsprint costs outpacing revenue growth, and -15 promotional expenses for the introduction of KOSMO!, margins will be -30 under pressure and we project operating margin to decline to 4.1% in -45 2006 and 5.3% in 2007 from 7.4% in 2005. -60 Oct-04 Jun-05 Jun-05 Feb-06 2006 will be challenging for the group with the rise in newsprint cost projected to outpace growth in advertising and circulation revenue. We UTUS NAN SCM NST forecast a 48.9% YoY decline in pretax profit to MYR11.2 mln on revenue of MYR398.3 mln in 2006 due to an expected steep increase in newsprint Source: Bloomberg, S&P Equity Research cost. Helped by lower tax expense from reinvestment allowances, however, we project net profit to be down by 34.0% YoY.

Utusan Melayu (Malaysia)

Recommendation: HOLD

Stock Code: 5754 Bloomberg: UTUS MK Price: MYR1.05 12-Month Target Price: MYR1.13 Date: February 28, 2006

Recent Developments

Feb. 2006: Reported 4Q05 results. Net profit was MYR1.5 mln (down 72.6% QoQ) on revenue of MYR98.0 mln (up 3.0% QoQ), compared with MYR0.5 mln net profit and MYR95.4 mln revenue a year earlier.

Dec. 2005: Wholly-owned subsidiary PT Sinar Media Advertising (PT SMART) entered into a joint venture agreement with PT Trimitra Mulia Kencana (PT TRIMITRA). PT SMART will hold 40% equity interest in the JV, which will mainly provide advertisement media services in Indonesia.

Nov. 2005: Reported 3Q05 results. Net profit rose to MYR5.5 mln (up 6.6% QoQ) on revenue of MYR95.1 mln (up 5.3% QoQ), compared with MYR2.0 mln net profit and MYR88.3 mln revenue a year earlier.

Oct. 2005: Announced that the group secured a Serial Islamic Term Loan Facility amounting to MYR52 mln from Malayan Banking Bhd. (MAY MK, Not Ranked) on Jun. 3, 2005. The amount would be used for refinancing the outstanding indebtedness under a Revolving Underwriting Facility.

Sep. 2005: Disposed a 51% equity stake in Advance Screen Sdn. Bhd. to Classic Billboards (M) Sdn. Bhd. for MYR1.02 mln.

Profit & Loss FY Dec. / MYR mln 2004 2005 2006F 2007F Revenue 364.6 373.0 398.3 422.9 Operating Profit (EBIT) 25.5 27.4 16.5 22.2 Depreciation -24.0 -23.4 -23.9 -23.5 Net Interest Income / (Expense) -8.2 -8.5 -8.3 -8.7 Pretax Profit 19.6 21.8 11.2 16.4 Effective Tax Rate (%) 35.8 30.5 10.0 28.0 Net Profit 12.5 15.1 10.0 11.8 Operating Margin (%) 7.0 7.4 4.1 5.3 Pretax Margin (%) 5.4 5.9 2.8 3.9 Net Margin (%) 3.4 4.1 2.5 2.8 Source: Company data, S&P Equity Research

Balance Sheet FY Dec. / MYR mln 2003 2004 2005 Total Assets 424.5 474.9 508.3 Fixed Assets 226.5 212.4 225.2 Current Assets 178.3 245.1 266.7 Other LT Assets 19.7 17.4 16.5 Current Liabilities 136.6 190.7 156.1 LT Liabilities 90.9 76.4 130.9 Share Capital 109.2 109.2 109.2 Shareholders’ Funds 195.4 206.3 220.0 Source: Company data, S&P Equity Research

Required Disclosures

Standard & Poor’s Equity Research Services Disclaimers Standard & Poor’s Equity Research Services U.S. includes Standard & Poor’s This material is based upon information that we consider to be reliable, but neither Investment Advisory Services LLC; Standard & Poor’s Equity Research Services S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should Europe includes Standard & Poor’s LLC- London and Standard & Poor’s AB not be relied upon as such. With respect to reports issued by S&P LLC-Japan and (Sweden); Standard & Poor’s Equity Research Services Asia includes Standard & in the case of inconsistencies between the English and Japanese version of a Poor’s LLC’s offices in Hong Kong, Singapore and Tokyo, Standard & Poor’s report, the English version prevails. Neither S&P LLC nor S&P guarantees the Malaysia Sdn Bhd and Standard & Poor’s Information Services (Australia) Pty Ltd. accuracy of the translation. Assumptions, opinions and estimates constitute our . judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for Glossary results obtained from the use of this information. Past performance is not necessarily indicative of future results. Strong Buy: Total return is expected to outperform the total return of the KLCI or KL Emas Index respectively, by a wide margin over the coming 12 months, with This material is not intended as an offer or solicitation for the purchase or sale of shares rising in price on an absolute basis. any security or other financial instrument. Securities, financial instruments or Buy: Total return is expected to outperform the total return of the KLCI or KL Emas strategies mentioned herein may not be suitable for all investors. Any opinions Index respectively, over the coming 12 months, with shares rising in price on an expressed herein are given in good faith, are subject to change without notice, and absolute basis. are only correct as of the stated date of their issue. Prices, values, or income from Hold: Total return is expected to closely approximate the total return of the KLCI or any securities or investments mentioned in this report may fall against the interests KL Emas Index respectively, over the coming 12 months with shares generally of the investor and the investor may get back less than the amount invested. Where rising in price on an absolute basis. an investment is described as being likely to yield income, please note that the Sell: Total return is expected to underperform the total return of the KLCI or KL amount of income that the investor will receive from such an investment may Emas Index respectively, over the coming 12 months and share price is not fluctuate. Where an investment or security is denominated in a different currency to anticipated to show a gain. the investor’s currency of reference, changes in rates of exchange may have an Strong Sell: Total return is expected to underperform the total return of the KLCI or adverse effect on the value, price or income of or from that investment to the KL Emas Index respectively, over the coming 12 months by a wide margin, with investor. The information contained in this report does not constitute advice on the shares falling in price on an absolute basis. tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial S&P 12 Month Target Price – The S&P equity analyst’s projection of the market instruments or strategies to you. Before acting on any recommendation in this price a given security will command 12 months hence, based on a combination of material, you should consider whether it is suitable for your particular intrinsic, relative, and private market valuation metrics. circumstances and, if necessary, seek professional advice.

For residents of the U.K. This report is only directed at and should only be relied on Required Disclosures by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to All of the views expressed in this research report accurately reflect the (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order research analyst's personal views regarding any and all of the subject 2001, respectively. securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views For residents of Malaysia. All queries in relation to this report should be referred to: expressed in this research report. Alexander Chia, ACA [email protected] Hoe Lee Leng, CPA [email protected] Additional information is available upon request. Tam Ching Wah [email protected]

Other Disclosures This report has been prepared and issued by Standard & Poor’s and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor’s Investment Advisory Services LLC (“SPIAS”). In the United States, research reports are issued by Standard & Poor’s (“S&P”), in the United Kingdom by Standard & Poor’s LLC (“S&P LLC”), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor’s LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor’s LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor’s LLC, which is regulated by the Kanto Financial Bureau; in Sweden by Standard & Poor’s AB (“S&P AB”), in Malaysia by Standard & Poor’s Malaysia Sdn Bhd (“S&PM”) which is regulated by the Securities Commission and in Australia by Standard & Poor’s Information Services (Australia)

Pty Ltd (“SPIS”) which is regulated by the Australian Securities & Investments Commission. . The research and analytical services performed by SPIAS, S&P LLC, S&P AB, S&PM and SPIS are each conducted separately from any other analytical activity of Standard & Poor’s.

CMDF-Bursa Research Scheme (“CBRS”) This report has been prepared by S&PM for purposes of CBRS administered by Bursa Malaysia Berhad, independent from any influence from CBRS or the subject company. S&P will receive total compensation of MYR15,000 each year for each company covered by it under CBRS. For more information about CBRS, please visit Bursa Malaysia’s website at: http://www.bursamalaysia.com/website/listing/cbrs.htm