Investment Highlights

• We maintain our NEUTRAL stance on the media sector for 2H19 due to its continued gloomy prospects. The performance of media companies continued to be weighed by the structural shift from traditional media to digital media, with falling print circulation and weaker adex revenue seen for the TV, print and radio segments. However, cheap valuations of traditional media companies after declines in their share prices make them attractive targets for privatization and merger & acquisition activities.

• 1QCY19 results ex-Astro all came in below expectations: 1QFY19 results for Media Prima and Star Media, and 4QFY19 results for Media Chinese all came in below expectations attributed to a weaker industry-wide adex of 14% YoY in 1QCY19 impacting the performance of traditional media segments i.e. the TV, print and radio segments. Furthermore, circulation revenues continue to be impacted by declining print circulation. This was despite positive YoY performance seen from other segments such as Media Prima’s CJ Wow Shop and Media Chinese’s travel segment.

• Consumer sentiment index tapers off: The Malaysian Institute of Economic Research’s (MIER) Consumer Sentiments Index (CSI) dipped to 85.6 in 1Q19 from 96.8 in 4Q18, remaining below the optimism threshold level of 100 points. Moving ahead, consumer spending is expected to remain cautious for the remaining quarters.

• 2H19 adex outlook remains soft: According to Nielsen Media research, industry adex for 1QCY19 dropped by 14% YoY and 22% QoQ, impacting the earnings of local media companies. For the past 3 years, 1Q has been a historically weaker adex quarter with expectations of relatively better adex for the quarters ahead. However, the outlook for adex in 2H19 is expected to be soft overall due to weak market sentiments and a lack of major catalysts. Free-to-air (FTA) TV and newspapers remain the two most popular medium for adspend at 46% and 39% of total adspend respectively.

• Deterioration of print circulation continues: In 2H18, the Audit Bureau of Circulations Malaysia (ABCM) reported that total newspaper circulation tumbled by 16% vs. 1H18, the largest half-on-half decline since 2013, mainly due to a 28% decline in Chinese newspapers’ circulation. With no clear sign on whether the decline in circulation has bottomed, print companies’ performance would continue to be affected by declining print revenues.

• Progress of analogue switch-off (ASO): The government will be switching its transmission of analogue terrestrial TV broadcasting to fully digital broadcasting by 3QCY19, with the public being urged to make the necessary preparation to switch over now to enjoy digital broadcasts. As at 15 May 2019, MYTV has distributed 2mil decoders to eligible Bantuan Sara Hidup Rakyat (BSHR) recipients with myFreeview’s coverage currently covering 98% of populated areas. The ASO will help narrow the digital divide especially in remote areas as Malaysians would be able to enjoy better audio and video quality, have access to more TV channels, and in future will have access to interactive TV services such as home shopping and video-on-demand (VOD) services.

Media Prima is slightly positive on the ASO after successfully negotiating for a lower hike in transmission fees, however, remains concerned on the ASO rollout, particularly the transitioning of the rest of the public to digital viewing.

• Promising home shopping performance: In 1QFY19, Media Prima’s home shopping segment was the only segment to report positive performance, with revenue rising 24% YoY to RM54.5mil due to greater exposure achieved from dedicating more hours on NTV7 and Channel 9. Media Prima targets CJ Wow Shop to break even by CY2019.

• Cost-saving initiatives a must in light of declining revenues: As traditional revenues continue to decline, industry players focus on managing costs to improve profitability. Efforts include workforce optimization exercises such as: (i) mutual separation scheme / early retirement option (MSS/ERO) exercises; (ii) consolidation of printing operations and routes for print companies; (iii) disposal of PPE such as Media Prima’s sale and leaseback exercise for its Bangsar and Shah Alam properties; (iv) the cessation of over-the-top (OTT) platforms such as Astro’s Tribe and streaming app Tamago and Media Prima’s cessation of tonton’s subscription model; and (v) the sharing of printing facilities as done by the News Straits Times Press and Karangkraf. Overall, we do not discount the possibility of further cost-saving initiatives particularly workforce optimization for companies’ traditional media segments which are impacted by high labour costs.

Source: AmInvest Research - 12 Jul 2019