- We downgrade the Media Sector to NEUTRAL, as we see a diminishing prospect of a strong adex recovery in the second half of the year. We have previously expected a stronger recovery with the conclusion of GE13, as uncertainties and the election overhang are lifted.

- However, traditional advertisers appear to remain cautious after the election, as planned adex spending and sentiment continue to remain weak. This is further underscored by:- i) uncertainties caused by the evolving macro conditions, exacerbated by the recent turmoil in the Middle East; and ii) recently renewed newsflow on the implementation of GST and subsidy rationalisations.

- Consequently, we expect adex to remain lacklustre for the second half, before seeing gradual improvements in 2014, buoyed by more adex-friendly events such as the FIFA World Cup.

- To be sure, YTD July adex showed a growth of 8.1%, after stripping out additional Pay TV channels that distort YoY comparisons. Note that the growth is primarily backed by strong Pay TV adex that grew by 28% YoY on a normalised basis. Excluding Pay TV adex entirely, it was a rather muted adex growth of only 1.2%.

- FTA adex grew by 4% YoY in the first seven months of the year. However, on a monthly basis, July FTA adex saw a drop of 6.5% from June and declined by 10.8% compared with July adex in 2012, due to a high base in 2012 because of major events such as the UEFA European Championship. Similarly, June FTA adex also fell by 4.5% YoY.

- Furthermore, YTD newspaper adex only saw a growth of 1%, mainly supported by the resilient Chinese-language adex which grew by 6%, while Malay and English adex dipped by 1% and 0.5%, respectively.

- We currently have HOLD recommendations on Astro Malaysia (FV: RM3.08/share) and Star Publications (FV: RM2.78/share). Although Astro benefited from a high growth in adex, it only accounts for ~10% of its revenue. The bulk of its revenue is derived from fees from its subscribers. It remains a HOLD due to its heavy capex cycle that is yet to peak, while dividend yield is only at 2-3%. We expect Star’s earnings to remain subdued, given the weak adex outlook in the English print segment.

- Nonetheless, we still have BUY recommendations on Media Prima (FV: RM3.17/share) and Media Chinese International (RM1.28/share). Media Prima remains a BUY as we think its earnings are still intact, due to its dominance in the FTA segment and their diversified and integrated media platform. It also strives to reduce its dependence on advertising revenue, which currently accounts for 80% of its revenue, by growing its content business. Media Chinese, sustained by the strong outlook Chinese-language adex, is trading at near its year low currently, at its historical average PE level of 10x, and with a dividend yield of 6%.

Source: AmeSecurities