We expect adex to remain challenging due to the continuous weak private consumption and the absence of friendly adex events. More pressure is to be seen in the print segment due to declining circulation. In addition, the possibility to cap up to 10% ownership from political parties in media companies may see the need for some stake reduction. Astro may lose their sport event broadcast in the future due to the news of Facebook securing the broadcast right in neighbouring ASEAN countries. We also discount the possibility of more asset unlocking activity by media companies given the soft property market. Maintain UNDERWEIGHT view on the sector.

Adex expected to remain weak in 2019. While the Consumer Sentiment Index (CSI) improved since 1Q17, this failed to spur total adex (excluding digital and pay TV) which continued to dwindle since 2015 (-17% YoY in 1H18). The subdued adex spending linked mostly to the moderation in print media (-17.6% in 1H18) which was hurt by ailing circulation trends. Moving into 2019, we expect adex to remain challenging due to moderating private consumption and the absence of adex friendly events.

More pressure for print. We expect more pressure to be seen in the print segment due to declining circulation (-21.5% in 1H18) that shifted to digital based. We opine that the cost cutting measures (MSS) will not be sufficient to mitigate the falling revenue. To add the woes, we estimate that RM will weaken against USD in 2019, and newsprint players (Star and Media Prima) have 30% of total print cost in RM.

Digital platform need time to digest. While the growth in digital revenues has been promising, we believe the digital platforms media have yet to translate into significant earnings contribution and require long gestation period before it turn into breakeven and become the regular earnings contributor. We believe that despite the promising growth, the small earnings base for digital platforms is not sufficient to mitigate the declining revenue from traditional media platforms.

Capping political ownership. Recent news reported the possibility of restructuring the ownership structure of media companies by limiting the shareholding of political parties and other entities to 10%. This move is to ensure the view from media is free from political bias and maintains press freedom. Should this happen, it may be necessary for the Malaysia Chinese Association (MCA) to pare down its stake in Star (42.5%) while the United Malays National Organisation’s (UMNO) stake in Media Prima is 8.0% via Altima Inc, but this is already lower than the 10% cap.

Possibility of premium sports content moving away from pay-TV. Facebook won rights to stream Premier League from 2019-2022 in neighbouring countries like Cambodia, Laos, Thailand and Vietnam. In the longer term, we do not discount the possibility of the same exercise in Malaysia. Turning to digital platforms like Facebook can help the Premier League maximize viewership as consumers increasingly shun pay-TV. According to The Times, the league has also held talks with YouTube and Netflix over rights deals.

Cost rationalisation not possible in 2019. Despite media companies facing cash constraints, we discount the possibility significant asset unlocking activity. We believe the soft property market will slow down land and building sales given the recent rise in Real Property Gains Tax. We only expect more cost rationalisation activity via MSS (for Media Prima and Star) and renegotiation of content cost for Astro.

Ability to pay out dividend. Despite the challenging issues, we like Astro as a dividend play with its attractive yield of 7.0% in 2019 with payout of 85%. For Star, we project the yield of 8.3%. We do not expect Media Prima to deliver any dividend given its challenging business environment.

Maintain UNDERWEIGHT. We believe the sector will remain lacklustre, given the weakness in print segment and declining adex on traditional platform. In addition, consumer habits are fast gravitating towards the digital space while Malaysia media players are slow to migrate from the traditional to digital space. Our only BUY is Astro mainly on its attractive dividend yield of 7.0%. We maintain UNDERWEIGHT on the sector.

Source: Hong Leong Investment Bank Research - 15 Jan 2019