Highlights

• 2016 continued the trend of dismal adex condition, affected by weak consumer and business sentiments caused by political uncertainty and weak MYR leading to a holding back of ad spends by advertisers.

• 9M16 industry adex has been substandard, contracting by circa 3% yoy (excl. payTV) despite coming from a lower adex base in 9M15 (-5% yoy). FTA TV +1.3%; Newspaper -12.8%; Magazine +42.8%; Radio +16.7%; Cinema +34.3%; OOH +5.2% and Retail -3.6%.

• The 12.8% yoy adex decline in the newspaper division is the main perpetrator for the overall gross adex contraction. Print circulation numbers too have been on a downtrend. We foresee that the outlook for the newsprint segment will continue to be challenging due to the ongoing drive of digital migration by the traditional print advertisers.

• The media industry is facing continued pressure from online streaming as an alternative to paid content and advertising platform, with better flexibility and a more targeted advertising.

• Latest data from MIER showed that the quarterly figure or both Consumer Sentiment Index (CSI) and Business Condition Index (BCI) remained subdued at 73.6 pts and 83.9 pts, respectively which are below the threshold of optimism. Hence we expect adex to remain weak in the near term after contracting slightly by 1-2% for 2016. With this in mind, we expect adex to contract at circa 3% in 2017.

• Astro remains our top pick as we still prefer the pay-TV segment. We like Astro due to its resilient nature, independence from traditional adex and its growing home shopping business coupled with its decent dividend yield of 5.5%.

Risks

• (1) Accelerated shift to online media from traditional media;

• (2) Threat of new players;

• (3) Prolonged weak consumer/business confidence; and

• (4) Increase in raw material prices and content costs.

Rating/ Valuation

NEUTRAL ( ↔ )

• Retain our Neutral view on the sector due to dismal adex growth resulting from weak consumer sentiment underpinned by macroeconomic headwinds, shift in media platform and challenging business environment.

• Astro ( BUY; TP: RM3.01 based on DCF valuation).

• Star ( HOLD; TP: RM2.50 based on targeted dividend yield of 6%).

• MCIL ( HOLD; TP: RM0.61 based on unchanged P/E multiple of 9.5x (1SD below average mean)).

• Media Prima ( SELL ; TP: RM0.87 pegged to 10x P/E (4 year historical average P/E) FY17 EPS).

Source: Hong Leong Investment Bank Research - 9 Jan 2017