We are maintaining our NEUTRAL view on the media sector. May gross adex grew 7.8% MoM, bringing the YTD adex growth to +0.3% YoY. The improvement was within the industry players and our expectations given that adex tends to gradually increase through the year before reaching its highest in the 4Q. While we are retaining our CY12 11.1% YoY adex forecast at this juncture, we may review our number should the June adex come in below our expectation. We have lowered our media companies' CY12-CY14 earnings estimates to align them with our in-house's latest changes in the USD/RM forex assumptions. Post-earnings revision, we are keeping our OUTPERFORM rating on Media Chinese International ('MEDIAC') but lowered its target price to RM1.33 (from RM1.36 previously) based on a targeted FY13 PER of 12.2x (+1SD). Meanwhile, our Media Prima ('MEDIA') and Star Publications ('STAR') target prices have been cut to RM2.40 and RM3.28 (from RM2.62 and RM3.40 previously) based on targeted FY13 PER of 13.0x and 13.4x, respectively. Our MARKET PERFORM calls on MEDIA and STAR remain unchanged.  '

The YTD May gross adex grew by +0.3% YoY or +7.8% MoM (vs. YTD April of -0.7% YoY or +4.4% MoM) to RM4.1b according to Nielsen. The higher growth was mainly driven by all mediums but partially offset by the lower growth in the FTA (-7.9%), Internet (-2.4%) and Newspaper (-1.3%) segments. We believe the drop in the FTA adex was mainly caused by the increased adex spending in the Pay TV segment as a result of a higher household penetration rate (1Q12: 46.4% vs.  4Q11: 45.5%). The improved adex sentiment was within ours and the industry's expectations, with 1Q adex typically being the lowest of the year and gradually increasing before reaching its peak in the 4Q. On the market share, newspapers continued to command the lion share with a 41.3% of the YTD May total adex followed by 26.0% for FTA TV and 23.5% for Pay TV. The adex spending trend in the non-traditional medium (i.e. Magazines, Outdoor, In-store, Internet and Cinema) has continued to increase and accounted for 5.1% (vs 4.6%) of the YTD market share. This implied that advertisers now tend to focus on more targeted groups and interactive media.  

Newspaper YTD gross adex lower by -2.0% YoY to RM1.5b. The dip was led by the negative growth in both the English (-7.7% YoY) and Chinese (-1.7% YoY) segments but was partially offset by a higher contribution from the Malay (+5.0% YoY) segment. On a MoM basis, all the languages newspapers improved in May with English experiencing the largest expansion of 6.3% followed by Chinese (+5.4%) and Malay (+5.3%). MEDIAC, STAR and MEDIA's gross adex recorded a +4.8%, +8.2% and +6.1% hike in May on a MoM basis. 

YTD, Pay TV gross adex continued to strengthen by 12.1% YoY to RM965m at the expense of FTA TV, which contracted by 7.9% YoY. On a MoM basis, total TV adex experienced a strong jump of 9.7% driven by the looming start of UEFA EURO. This has led MEDIA's gross TV adex to jump 12.1% MoM, surpassing the other FTA TV (+3.8%) and Pay TV (+8.5%) segments. On the market share, FTA TV continued to command the lion share of the total YTD TV adex, accounting for 52.5% (YTD May 11: 57.4%).    

Sentiment improved but may come in below-than-expected on a full-year basis. While May gross adex has finally picked up some momentum, it may still likely be below our expectation on a full-year basis, which we have forecasted an adex growth of 11.1% in CY12. We are retaining our adex forecast for now but may review our numbers should June's adex come in below our expectation. Note that June  adex should theoretically record a strong growth due to the pre-Olympic game and Hari Raya festival.

Lower earnings due to change in forex assumptions. We have updated our earnings assumptions to align it with our in-house's latest changes in the USD/RM forecast rate (CY12: RM3.09, CY13: RM3.01 and CY14: RM2.84 vs. RM2.90, RM2.80 and RM2.80 previously). Pursuant to these adjustments, MEDIA saw the biggest negative revision to its earnings by -1.6% to -5.2% for its FY12-FY14 while STAR's earnings have been cut by -0.8% to -4.4% during the same period. MEDIAC's FY13-FY14 earnings are also reduced by -0.4% to -1.6% as a result of its USD exposure in both the revenue and cost.

Source: Kenanga