- Improving Adex sentiment. We see an uplift in consumer and advertiser sentiment, albeit gradually. Going forward, we expect Adex to pick up sequentially from the second half of this year onwards with the general election behind us, coupled with the seasonality effect of advertisers exhausting their budgets towards year end. Based on our estimates, the media sector is projected to grow by 8.7% in CY13 followed by 11.2% in CY14, from 8.3% and 8.9% in our previous estimates.

- Stripping out the additional Pay TV channels monitored by Nielsen, the industry saw a normalised Adex growth of 5.3% YoY for 5MCY13. On a sequential basis, the normalised Adex grew by 11.1% month-on-month in May (compared with -0.9% in April), signifying an immediate recovery in advertising trend with the conclusion of the election.

- Circulation remains stable. The latest circulation report (Jul-12 to Dec-12) released by the Audit Bureau of Circulation indicates that circulation has improved YoY in 2HCY12 by 4.6%, but declined by 1.1% compared with 1HCY12. Overall, circulation has remained stable hovering around 4.7-4.9mil copies. Adex for vernacular newspapers appears to remain strong. The Chinese-language newspaper Adex saw a growth of 7.7% YoY for the first 5 months, while Tamil newspaper Adex grew by 14.6%.

- Newsprint price continues to soften. Newsprint spot price has seen a consistent decline for the past 2 years. Spot newsprint was last traded at US$590/MT, a 2-year low. This bodes well for newspaper companies with a shorter newsprint inventory policy. We have assumed a newsprint cost (inclusive of freight and duty charges) of between US$650/MT and US$700/MT. The investigation by Miti regarding the allegations on newsprint dumping by producers from Belgium, Germany, Sweden and United Kingdom and a preliminary determination has to be made within 120 days from the initial launch of the investigation in April.

- Content creation going forward for FTA player. Going forward, content creation will be the key focus for FTA player Media Prima (MPrima). However, contribution to its bottom-line is insignificant for now, and its ability to monetize its contents remains to be seen. Furthermore, the potential to translate its contents into higher Adex is uncertain as its market share has remained fairly flat over the past 1-2 years.

- Pay TV outlook intact, driven by subscriptions. Although Pay-TV commands a significant portion (33% market share) of Adex, it is interesting to note that Adex only contributes about 10% to the total revenue of the incumbent Pay-TV operator, Astro Malaysia Holdings (Astro). Revenue derived from subscription to its services makes up about 89% of its top-line. On top of that, Astro has acquired the necessary broadcasting license to provide broadcasting services in Malaysia with exclusivity on DTH satellite TV services until 2017 and non-exclusivity until 2022.

- Decent dividend yields. No major capex is expected for most media companies (with the exception of Astro), and hence a good dividend yield is expected with a payout range of 50-80%. This is essential especially in an environment of tightening interest rates recently. Star tops the list with a yield of 6.5%, followed by MPrima with a yield of 5.6%, while MCIL pays a dividend yield of 5.3%. Astro is at the bottom with the least attractive yield of 2.3%. We also compare the spread of free cash flow to equity (FCFe) yield and dividend yield for potential upsides to the current dividends. As illustrated in Table 3, Star, MCIL and Astro still has room for a higher dividend payout, whereas MPrima’s dividend payout (currently at a 70% payout for FY13F based on our assumption) is at its optimum.

- Buy Media Chinese, Star Publications and Media Prima. We continue to like MPrima for its integrated operations across various platforms and Adex growth that is skewed towards the TV segment. We like Media Chinese International for its dominant market share of over 85% in the Chinese-language newspaper segment, which directly benefits from a strong readership and decent growth in Adex in vernacular newspapers, and also its decent dividend yield of 5%. Star Publications remains attractive for its high dividend yield of over 6%.

- Maintain HOLD on Astro with a higher fair value. We raise our fair value for Astro to RM3.08/share from RM2.89/share, as we lift our earnings estimates to account for a higher EBITDA margin. We are positive on Astro, with its many products in the pipeline and strong in-house production capabilities, providing up to 40,000 hours of content. However, we believe that Astro will be laden by its heavy capex cycle that will only peak in FY15F, based on our estimation. Assuming a 75% payout, Astro only pays a dividend yield of 2%, far from the 5-6% range of other media players.

Source: AmeSecurities