It is no surprise that the relaxation of pandemic restrictions and the resumption of economic activities helped to drive the growth and recovery in adex seen in 10M22 vs 2021. However, as revenge spending by consumers normalizes following the diminishing base effect and weakening consumer sentiment caused by inflationary risks, advertisers could be more cautious on their ad spend. We therefore downgrade our sector rating to NEUTRAL. There are no changes to our calls and TPs for Astro (BUY; TP: RM1.15), Star (HOLD; TP: RM0.31) and Media Prima (BUY; TP: RM0.54). Top pick for the sector is Astro.

Adex improvement. Unsurprisingly, Malaysia’s adex environment saw vast improvement in 2022 compared to 2021 as the country transitioned to endemicity on 1 Apr, allowing the economy to completely reopen. Based on Nielsen’s data (see Figure #1), 10M22 adex grew by 12% with total industry adex reaching RM5.3bn (10M21: RM4.73bn), following the country’s full reopening of economic activities. All segments registered YoY growths except for in-store media (-66.4%). Top 3 biggest improvements were seen in the cinema (+9.2x), digital (+33.6%) and radio (+29.4%) segments. Notably, we are seeing a bigger shift away from newspapers as a major advertising segment into digital as the gap between the two has widened further (newspapers vs digital adex for 10M21: RM722.3m vs RM815.2m; for 10M22: RM863.8m vs RM1.1bn).

Bleak sentiments. MIER’s latest Consumer Sentiment Index (CSI) and Business Conditions Index (BCI) for 3Q22 came in at 98.4 and 99.8 points respectively, which are both still below the 100-point optimism threshold (see Figure #2). While the QoQ improvement is noted, it is still too early to consider that as indicating optimism. With an uncertain economic outlook for 2023, any decline in consumer spending could negatively impact advertiser’s sentiment and thus lower adex spending. Other than that, the RAM-CTOS Business Confidence Index reading for 4Q22 came in at 46.2 (see Figure #3). This has declined for two consecutive quarters, with the latest reading below the 50-point neutral mark (i.e. >50 is positive, <50 is negative). Firms surveyed stated rising costs to be the main challenge faced with the weakening economy coming in second. Should inflation remain elevated, costs could remain higher for longer and hamper any improvement in business sentiment.

Weakening USD against RM. The USD has begun to come off its peak while the RM has regained its strength post GE15. Should the USD continue to weaken relative to the RM in the following months, this will help ease elevated newsprint costs which is a positive for Star Media, as its print segment might see margin improvements, whereas Astro might see lower hedging costs as the group regularly hedges its USD exposure.

2023 Outlook. With the merits of economic reopening mostly reaped in 2022, the base effect would start to diminish this year. A key dampener to consumer sentiment would be the rising cost of living which would lead to consumers cutting back on discretionary spending – this may in turn cause advertisers to be more cautious with their ad spend as well. 4Q22 adex should be stronger as advertisers spend more freely for the Christmas and Chinese New Year periods, as well as coming off the back of the FIFA World Cup. However, looking further ahead, there is a lack of clarity on the trend of adex following the fluidity of global economic events. For these reasons, we downgrade our sector rating to NEUTRAL (from Overweight). Top pick for the sector is Astro (BUY, TP: RM0.95) as we believe that following the recent selloff, most of the negatives facing the group have been priced in. Moreover, the stock has a projected FY23-24f dividend yield of 9.8%.

Source: Hong Leong Investment Bank Research - 5 Jan 2023