Investment Highlights

• A tough environment for media in 2H18. We have a NEUTRAL stance on the media sector for 2H18. The sector's prospects over the next 6 months are unexciting as digitalisation initiatives undertaken by the media companies remain ineffectual in cushioning the decline in adex rates. Rising penetration of high-speed internet and falling costs of data are aggravating the already dreadful state of affairs, hastening the switch from traditional media towards digital mediums — in which entry barriers are low and monetisation is challenging. Nevertheless, all negatives considered, valuations of the media companies under our coverage are inexpensive, especially Astro Malaysia Holdings (BUY, FV: RM2.12) and Star Media Group (BUY, FV: RM1.57).

• Consumer sentiment to remain weak. We reckon that consumer sentiment will remain weak in 2H18 against the backdrop of Malaysia's high household debt-to-income ratio. Although data from the Malaysian Institute of Economic Research (MIER) showed that the Consumer Sentiment Index (CSI) has recovered from 70 in 4QCY16 to 91 in 1QCY18, it remained below the optimism threshold (100). We believe the recovery is transitory given a lacklustre job outlook and wages growth.

• No major adex stimulants in 2H. While 1H adex was likely supported by increased campaign advertising during the 14th general election, the Winter Olympics and FIFA World Cup, we see no major catalytic events in 2H that would shore up adex.
• Print still affected by ailing circulation. We believe publishing companies (Star Media Group, Media Prima and Media Chinese International) will continue to register a decline in circulation revenue. For the past 3 years, average daily circulation of Malaysian newspapers has been falling at an average rate of 6% every half year. The drop was most precipitous in Malay newspapers, which explains the inferior financial performance at Media Prima (HOLD, FV: RM0.35) recently. The pace of decline is likely to accelerate going forward as the switch to digital media continues. In addition, Media Prima’s FTA TV viewership continues to face pressure from alternative channels offered by NJOI and Unifi TV.
• Pay TV is spared temporarily. While digitalisation is moving quickly in the metropolis, we note that rural areas remain underpenetrated by high-speed internet. This would shelter pay TV subscriptions from churn momentarily, giving Astro a window for business transformation. For this reason, we believe Astro's earnings will be among the most resilient in 2H18, given subscription revenue still constitutes the bulk of its revenue (>80%). However, over the longer term, competition is bound to intensify as smooth content streaming becomes possible with cheaper alternatives, such as over-the-top (OTT) media and IPTV.

• Other media platforms remain relevant. The radio and out-of-home segments appear relatively more resilient. Data from Gfk Radio Audience Measurement showed that radio listenership and time spent listening in 2017 remained relatively unchanged compared with 2016. In the out-of-home segment, earnings are underpinned by migration from traditional billboards to digital panels, which command better margins. In addition, there were new roll-outs of advertising panels following the completion of the MRT. Taking the developments into account, adex in both the segments is expected to hold up in 2H18.

• Re-rating catalyst lies in sentiment revival. We may upgrade our sector call from NEUTRAL to OVERWEIGHT should the CSI revisit the 100 mark (i.e. the optimism threshold), which confirms the restoration of consumer confidence. This would in turn provide companies with confidence to spend on advertising and reignite adex rates across all mediums. Besides sentiment, we would also turn positive if the aforementioned digitalisation initiatives begin to gain traction, i.e. if revenue from digital businesses outgrow that of traditional media.

• Key risks are muted consumer market and ease of entry into online media. We are concerned that a low entry barrier in the online media industry would continue to escalate competition, rendering monetisation of digital platforms all the more challenging. Therefore, in the event that our local media companies fail to grow digital reach for a sustained period, we may downgrade the sector from NEUTRAL to UNDERWEIGHT. In addition, if consumer sentiment deteriorates significantly from this point, we would also turn negative on the sector.

• Our sector top picks are:
  Star Media Group (BUY, FV: RM1.57) has embarked on several rationalisation exercises to improve its bottom line. Collectively, we estimate that the group would reap savings of RM30-40mil/year from the restructuring exercises. In addition, the company offers good value with a net cash per share of RM0.44 and a price-to-book (P/B) of 0.9x, which is below its 3-year average P/B of 1.25x. Dividend yield is also attractive at ~6%. 
  Astro Malaysia Holdings (BUY, FV: RM2.12) has begun implementing several digitalisation initiatives to improve cost-toserve efficiency, including the introduction of chat bots to attend to basic customer queries in place of human personnel. Astro appears undervalued with a forward PE of 12x vs. its 1-year historical average of 23x. Expected dividend yield is also attractive at ~8% per annum.

Source: AmInvest Research - 6 Jul 2018