In an environment of deteriorating advertising spend MCU has...

In an environment of deteriorating advertising spend MCU has reported a solid 12.5% increase in headline net profit to $8.1m for 1H09. This result was driven by above system advertising growth: online billings once again grew faster than Australian online ad spent, with 42% growth for the December 08, compared with system growth of 25.7%; and Australian traditional media billings grew by an impressive 5.2%, against an industry decline of 3.8%. MCU’s outperformance against the industry was underpinned by net customer gains and the expansion of its national footprint.

Our price target of $0.63 has been set at 8x FY10f EPS (~10% discount to the sector average), while our DCF valuation has been reduced from $0.95 to $0.89 (WACC 13.5%, terminal growth 2.0%).

We retain our Buy as we see MCU as one of the rare companies in the media and advertising sector that is likely to report EPS growth. Investment risks are reduced by the company having a sound balance sheet, with net debt of only $9.8m (7% net debt/equity), very strong interest cover of 15.6x (EBIT/net interest), no debt refinancing requirements until FY11, and a track record of gaining market share during industry downturns. Overall, MCU remains fundamentally cheap, trading on a FY09f P/E of 6.3x and 9.1% fully franked yield.