2020 Will Witness Two Major Sporting Events; EURO and Tokyo Olympics. Despite So, We Are Not Optimistic That This Will Arrest the Adex Downtrend. The Battle for Local OTT Is Intensifying With the Introduction of Various Providers Into the Local Market. We Expect Continuous Efforts on Reducing Opex as These Strategies Are Crucial for Media Companies Given Their Flattish/declining Top Line. The Expected Strengthening of USD in 2020 Will Not Bode Well for Earnings During Major Sporting Event (higher Content Cost) Especially for Astro. We Maintain UNDERWEIGHT View on the Sector Given Prolonged Adex Weakness While the Growth in Digital Segment Has Been Unable to Offset This.

Major events may not be enough. 2020 will witness two major sporting events; EURO and Tokyo Olympics. Despite so, we are not optimistic that the adex friendly events will be sufficient to arrest the adex downtrend. Recall that during World Cup 2018, adex dipped by -7.3% YoY, led by the print segment. In addition, both consumer and business sentiment have been down trending post GE14 (below the 100 threshold) and this may further drag ad spending.

Intensifying OTT services. The battle amongst OTTs is intensifying with the introduction of new providers, namely Disney+ and Apply TV (both likely to enter Malaysia this year) to compete with Iflix, Netflix and AstroGo. This will pose a challenge for Astro to boost its subscriber base for AstroGo (currently at 2.4m).

Cost savings mode. We expect continuous efforts on reducing opex as these strategies are crucial for media companies given their flattish/declining top line. However, with the exception of Media Prima, we believe that no major cost cutting exercise (i.e. MSS/VSS) are on the cards as most have already undertaken it. Media Prima will launch another round of VSS, to trim further a sizeable share of its c.3900 employees this year.

Weakening ringgit. The strengthening of USD will not bode well for earnings especially during major sporting events. We expect MYR-USD to average 4.15-4.20 in 2020 vs 2019 at 4.14. We expect Astro content cost to account as high as 37% of revenue, a level witnessed during FY19 (from World Cup 2018). While for FTA-tv, this should not be a significant issue as the bulk of its content is local based.

To ramp up non-traditional contribution. Media companies have over the years geared towards strengthening their digital presence but the bottom line contribution still not meaningful given longer gestation period. However, the efforts are positive in capturing the digital adex share as advertisers are increasingly moving into the digital space. We expect Media Prima and Astro’s home shopping to register positive EBITDA by end-2020. Maintain UNDERWEIGHT. Despite major sporting events in 2020, we foresee no end to the earnings woes due to the structural shift from traditional to online media. In addition, the earnings contribution from digital segment is still lagging and yet to cushion the falling traditional revenue. As such, we reiterate our UNDERWEIGHT rating on the media sector. We maintain our calls and TPs for Astro (BUY; TP: RM1.64), and Media Prima (HOLD; TP: RM0.29). We downgrade rating on Star (SELL; TP: RM0.40) as share price appreciated 10% since our Hold upgrade on 29 Nov 2019). Astro is only our BUY rating for the sector, as it reaps the benefits from its cost rationalisation exercise while its dividend yield at 6% is another plus point.

Source: Hong Leong Investment Bank Research - 15 Jan 2020