Highlights

• What happened last year…? Adex growth was sluggish. Consumer sentiment was impacted by electricity hike in January 2014, twin aviation disasters – MH370 & MH17 as well as removal of fuel subsidy etc.

• Moving on to 2015, we expect media sector to continue to remain soft. MIER’s CSI & BCI has dropped under 100 point thresholds to 98.0 and 95.9 points, respectively. Thus, consumer sentiment is expected to remain subdued while business community to experience lower demands and sales performance.

• Sentiment would not get any better… GST implementation will further erode purchasing power, affecting adex spending. For 1Q15, we believe advertisers would coax consumers into making more purchases leading up to the 6% GST.

• We forecast Malaysia to record a 4.8% GDP growth. As adex is correlated to GDP (see Figure #2), we are expecting Adex industry to grow circa 4%, which translates to GDP multiplier of 0.83x.

• A change in the media landscape is in order… More adex ringgit will flow to the TV medium. We believe outlook for newsprint will continue to be challenging as consumers prefer watching instead of reading.

• Digitalisation of FTA TV… No immediate impact to the sector. However, we think competition will intensify among the existing traditional and smaller media players.

• Depreciation of RM vs. USD… RM has depreciated notably against US$. Our house projection is for MYR to trade within the range of RM3.35-3.60/US$ in 2015, with a mid-point forecast of RM3.50/US$. However, as demand is lower due to strong migration towards the digital platform, we estimate newsprint prices to be on a downtrend trend. Thus, we believe it will neutralise the impact of weakening RM.

Risks

• (1) Weaker than expected consumer/business confidence;
• (2) Threat of new players; and
• (3) The increase of raw material prices and content costs.

Rating / Valuation

NEUTRAL

• As the media sector currently lacks any meaningful rerating catalysts, coupled with cautious adex spending by businesses and consumers, we are maintaining our NEUTRAL view on the sector.
• Top pick for sector exposure: Astro (BUY; TP: RM3.47; DCF valuation with WACC of 6.6% and TG of 1.0%).
• Star (BUY, TP: RM2.73; based on targeted dividend yield of 5.5%).
• MCIL (HOLD, TP: RM0.64; based on lower P/E multiple of 8x CY15 earnings; 5 year historical average P/E).
• Media Prima (HOLD, TP: RM1.77; pegged to 10.5x P/E FY15 EPS, based on 5 year historical average P/E).

Source: Hong Leong Investment Bank Research - 20 Jan 2015