With households hunkered down at home, it was initially viewed as an array of silver lining for media companies. However, the recent results reported by the media companies under our coverage proved otherwise. Nielsen’s total national gross adex painted a clearer picture of the recent adex tragedy. On the flipside, we have reason to believe that digital adex would only expand further, given increasingly digitally-oriented consumers. As traditional adex still outweigh digital adex, we believe that the media players might still need to endure the hit from digital disruption and wait for significant earnings improvement from the ir own digital ventures. We upgrade our sector rating from Underweight to NEUTRAL. Despite the sector prolonged gloomy sentiment that continues to be hit by the digital disruption coupled with the negative ramification from Covid- 19, we viewed that valuations have been significantly bashed down with Star Media and Media Prima that are trading below their NCPS. Our only BUY and top sector pick is Astro.

Covid-19 impact. The MCO that has been implemented and extended since 18 March to curb the pandemic was initially viewed as an array of silver lining for media companies. With most of the people staying home, it was expected that the media industry will flourish with a spike of engagement in TV viewing (positive for Astro and Media Prima) as well as people glued to the news portal for updates regarding development in the number of active cases (positive for Star Media and Media Prima).

Not all positive. Based on Astro, the viewership hours did climb significantly by 11.5% YoY while average daily viewers increased by 4.1% YoY. Media Prima Ripple garnered a total of 1.9m digital listeners, a 30% increase during MCO, compared to pre-MCO (1-17 March)(see Figure #2). Despite this, the rise in hours and engagement did not translate into revenue increment. While more people staying at home could amount to higher demand for entertainment and online news, this had been muted by the decline in adex spending by advertisers. The demand for newsprint on the other hand, has been impacted badly in favour of digital news platforms.

Pre-MCO vs MCO. To make a meaningful comparison, we take reference in Nielsen’s total national gross adex statistics (see Figure #3), dividing it to focus on the adex in the month of Mar-May 2020, comparing it YoY and QoQ to gain a clearer picture on the effect of MCO. In the period of Mar-May 2020, adex recorded a sequential decline of -40% from Dec-Feb (pre-MCO) and down -44% YoY, to only RM739m. The biggest drag came from the usual suspects, with adex declined in print (-59% QoQ) and radio (-57% QoQ). Note that although TV adex backsliding was relatively softer than the rest (-20% QoQ), it was however, the biggest chunk of the pie with 68% contribution of total adex during Mar-May 2020. In the Others division, the dive (-77% QoQ) was due to the cinema closures during the MCO/CMCO.

Exacerbated by the cheaper and faster internet services. Since the MCO took place in late March, the government has been partnering with the internet service providers to offer a free 1GB internet each day with automatic renewal (scheduled to last for the remainder for 2020) to adapt to the new norm of distance working and learning. With more accessible internet services, Astro saw a surge in their AstroGo sign ups (c.8%), aggravated by their complimentary free AstroGo viewing during the MCO-CMCO period. With this timely complimentary service put in place, as well as the bleak economic outlook, we see a potential of further deterioration in subscription revenue as some may consider downtrading to more affordable “freemium” services, NJIO (ARPU >RM2 vs Pay-TV’s RM99.1). This was apparent with the decline in Pay TV ARPU, registering -1.3% YoY from RM100.4/month to RM99.1/month in 1QFY21 (Feb-Apr 2020). This number was arrived after excluding subscribers who were disconnected during the period to better reflect the dire situation.

Digital transformation. Learning from past examples, we witness that the media companies are expanding their efforts towards digital transformation initiatives with increased relevance during this pandemic (introduction of paywall by Star Media and more OTT offering by Astro). While the growth in digital revenues has been promising, we believe the digital platforms have yet to translate into significant earnings contribution and require longer gestation period before they breakeven.

Tough paved road. While Malaysia has started to gradually ease lockdown measures, recovery is anticipated to be very sluggish. Weak economic activity is expected to persist in the near future. Despite the onset of RMCO, we have reason to believe profitability will be tepid, given perceived weaker discretionary spending for the remainder of 2020. As the economic conditions deteriorate so does the consumer sentiment index (see Figure #5). Advertisers turned more calculative in their adex spend and caused the media adex across TV, radio and newspaper to plunge significantly (see Figure #4). We believe it will be very challenging for the traditional media to move ahead with disruptions coming from digital front. This impact could be seen with the traditional media ceasing their operations as in the case with Utusan Malaysia in 4Q19 and Blu Inc Media Sdn Bhd in April 2020.

Adex pick up? On the flipside, we have reasons to believe that digital adex would only expand further, premised on the back of increasingly digitally-oriented consumers and more attractive advertising package offerings. As traditional adex still outweighs digital adex, we believe that the peers under our coverage still need to endure the hit from digital disruption and wait for significant earnings improvement from their own digital ventures despite their proactive strategy to increase online presence. However, we believe the bottom has yet to be seen given that traditional media still forms the lion’s share of the industry’s contribution.

Moving ahead. Aggregately, we expect the declining trend to persist for the remaining of the year on the back of (i) dire adex environment; (ii) moderating private consumption; and (iii) magnified digital disruptions as internet services become more accessible. Media companies’ bottom line will likely be strained on the back of downturn economic outlook with advertisers turning cautious on their spending, pay - TV and home shopping being hit by consumer cut on discretionary spending and newspaper circulation being halted with the accessible news from online media. With the aforementioned reasons, we are forecasting media companies’ earnings to continue to be beleaguered for the remaining of 2H20. We upgrade our sector rating from Underweight to NEUTRAL. Despite the sector’s prolonged gloomy sentiment that continues to be hit by the digital disruption coupled with the negative ramifications from Covid-19, we view that valuations have been significantly bashed down, with Star Media and Media Prima trading below their NCPS. We believe the sector will remain lacklustre, given the weakness in print segment and declining adex on traditional platform. Due to the structural changes in the media sector, the still larger chunks of the traditional businesses are paying the price, thus leading to a prolonged loss-making position while pursuing digital transformation initiatives, not to mention the lingering ramification from Covid-19. We maintain our calls and TPs for Astro (BUY; TP: RM1.15), Star (HOLD; TP RM0.41) and Media Prima (HOLD; TP: RM0.17). Astro is only our top pick for the sector, as it reaps the benefits from cost savings due to deferment of major sports events. Its attractive dividend yield at 8.1% is another plus point.

Source: Hong Leong Investment Bank Research - 20 Jul 2020