Investment Highlights

• Challenging environment persists amid structural shift in media: We maintain our NEUTRAL stance on the media sector for 1H19 as prospects remain unexciting. The monetization of digital initiatives remains challenging, causing a slow creep towards cushioning the decline in traditional media. Furthermore, lower fixed broadband prices with higher internet speeds made available nationwide are hastening consumers’ switch from traditional media to digital platforms, which enjoy lower entry barriers and intense competition. Additionally, the analogue switch-off (ASO) deadline looming near in 1QFY19 remains a cause of uncertainty for TV players, especially those in the free-to-air (FTA) space.

• Consumer sentiment expected to remain steady but subdued: According to the Malaysian Institute of Economic Research (MIER), the Consumer Sentiments Index (CSI) had reached a 21-year high of 132.9 in 2Q2018, which we believe was boosted by the tax holiday and optimism post-GE14. Meanwhile in 3Q2018, the CSI declined to 107.5 albeit still above the 100-point level. Moving forward, we expect consumers to remain optimistic but still cautious on their spending.

• 2019 adex outlook: Relative to the weaker adex in 2018, we are cautiously optimistic on adex in 2019 with major events being: (i) the AFC Asian Cup (January 2019); and (ii) the 2019 Southeast Asian (SEA) Games (November-December 2019), besides the usual Malaysian festivities and Merdeka celebration. YTD industry adex declined 3% YoY (radio -14%, TV -6% and digital +18%) amid the softer adex environment as advertisers turned cautious post-GE14. This was despite the year having major sporting events such as the Winter Olympics (February 2018) and the 2018 FIFA World Cup.

• Ailing circulation and high newsprint prices continue to drag print: Publishing companies Star Media (Star), Media Chinese (MCIL) and Media Prima (MPR) will continue to suffer from declining circulation revenue. Since 2015, the average daily circulation of newspapers has fallen at an average rate of 5% half-yearly with declines led by Malay newspapers. Meanwhile, YTD average newsprint prices have surged 13% YoY.

• Sharing of printing facilities the way to move forward? We are positive on MPR’s move for its publishing arm, The News Straits Times Press (NSTP), to collaborate with Karangkraf’s Ultimate Print with regards to its printing and distribution of newspapers since October 2018 as it allows for more efficient use of its physical assets whilst reducing operating costs.

• Focus on home shopping bodes well for some: Companies such as Astro Malaysia (Astro) and MPR which have home shopping segments have reported commendable progress YTD, with both companies’ recent 3Q results showing home shopping revenues offsetting declines in other traditional segments such as TV, radio and print.

• FTA TV outlook mired by the upcoming analogue switch-off (ASO): As at 29 Nov 2018, MYTV has a population coverage of 92.8% with its digital terrestrial television (DTT) infrastructure and its CEO Michael Chan remains committed to meeting the 1Q2019 deadline and target of 95.3% population coverage. With the infrastructure mostly in place for digital transmission, concerns fester around the implementation of the ASO rollout, particularly in transitioning consumers from analog to digital viewing.

• Over-the-top (OTT) space facing intense competition coupled with high costs: In light of a challenging operating environment in the OTT space, some media companies have changed their strategy with regards to OTT:
  MPR ceased its subscription model for tonton and has instead gone for a platform-agnostic approach through collaboration with YouTube and Dailymotion which should reduce platform operating costs and enable revenue generation from programmatic advertising.
  Astro has decided to cease operations of its regional OTT Tribe and streaming app Tamago in tandem with its ongoing strategic review of its business and group structure.
  Star’s OTT dimsum is still contributing losses as it is still in its gestation period for the next 3-4 years. However, the group will continue its regional expansion plan for dimsum, aiming to partner with regional partners in South East Asia.
• Re-rating catalyst: We may upgrade our sector call from NEUTRAL to OVERWEIGHT if: (i) the restoration of consumer confidence translates to confidence in spending on advertising, thus reigniting adex rates across all mediums, (ii) the aforementioned digitalization initiatives begin to gain traction, i.e. if revenue from digital businesses outgrow that of traditional media, and (iii) possibility of privatization or merger & acquisition opportunities.
• Key risks are slower-than-expected monetization of digital initiatives and weaker-than-expected adex: We are concerned that the intense competition in the digital space would continue to weigh on the monetization of digital platforms. In the event that local media companies fail to grow digital reach for a sustained period, we may downgrade the sector from NEUTRAL to UNDERWEIGHT. Additionally, if adex deteriorates significantly from this point, we would also turn negative on the sector.

• Our sector top pick is Astro Malaysia Holdings (BUY, FV: RM1.66): The group has embarked on a strategic review of its business and group structure, including cost rationalization and workforce optimization which would allow for future cost savings. Furthermore, Astro’s focus on stronger vernacular and local content creation i.e. through its JV with Karangkraf is a step in the right direction as vernacular content underpins its TV viewership share of 75%. We believe its current share price is undemanding, trading at 12.8x PE which is more than 1SD below its 4-year historical average PE of 25.0x and offers an attractive dividend yield of 8-9% p.a.

Source: AmInvest Research - 28 Dec 2018