Malaysia's advertising  expenditure  (adex)  grew  by  a  disappointing  2.0%  y-o-y  in 3QCY12,  with  9MCY12  numbers  closing  at  a  dismal  0.2%  growth  y-o-y.  The numbers  fell  way  below  our  expectation  of  a  2x  in-house  2012  GDP  forecast,  no thanks  to  weaknesses  in  both  the  TV  and  newspaper  segments  as  advertisers withheld spending on A&P activities in view of the sluggish consumer sentiment. Hence,  we  downgrade  the  media  sector  to  a  NEUTRAL.  We  also  revisited  our stock recommendations following our internal resources allocation.  
 
Subpar numbers.  According to  The  Nielsen  Co, 3QCY12  adex  came  in at  RM2.20bn, up by 2.0% y-o-y and 4.5% q-o-q. Cumulatively, 9MCY12 numbers closed rather flattish y-o-y at RM6.07bn, registering way below our previous guidance of 2x OSK's CY12 GDP forecast of 5.2%. On a segmental basis, the two biggest contributors, newspapers and free-to-air (FTA) TV, declined by 0.3% and 0.6% y-o-y respectively (see Table 2 for further details).
 
BM  and  Chinese  publications  dominate.  In  newspapers,  Malay  language  and Chinese publications continued to dominate, with their 9M adex income growing by 4.0% and 1.0% y-o-y respectively. As such, Media Prima and Media Chinese (MCIL) stretched their  market  shares  further  to  31.9%  and  21.1%  on  the  back  of  their  favourable newspaper mixes. The English segment, on the other hand, contracted 5.5% y-o-y. This came  at  the  expense  of  Star  Publications,  which  shed  a  1.8%  market  share  over  the period.
 
FTA  TV  dragged.  On  the  Free  To  Air  (FTA)  TV segment, Media Prima's four FTA TV channels  continued  to  dominate  the  airwaves,  defending  the company's  86.1%  market share during the 9M period. However, its market share contracted by 1.6% given that its growth had declined 2.0% y-o-y. Overall, TV's adex share shed 0.4% y-o-y in 9MCY12 to close at RM2.21bn.
 
Downgrade  to  NEUTRAL.  On  the  back  of  softer  adex  numbers  in  9MCY12,  we  are downgrading the media sector to a NEUTRAL as we believe the tepid growth trend will likely persist over the next six months. While 4Q is usually the best quarter owing to the festive season, adex growth for the full year is likely to come below our latest 2012 GDP forecast of 5.2%. Signs of weaknesses, especially in the TV segment, led us to believe that  consumer  brands  are  likely  to  withhold  their  advertising  spending  in  view  of  the uncertainties  in  the  current  global  economy  as  well  as  domestic  political  scene.  That said, we continue to see strength in the core fundamentals ofMCIL (BUY; FV: RM1.92) while  Media  Prima  (NEUTRAL;  FV:  RM2.43)  is more prone  to  downward  pressure  on earnings given  its exposure  to  the more  volatile  TV  segment. We make  no  changes  to our stance on Star (NEUTRAL; FV: RM3.12), which we recommend for its yield of over 6%  p.a.,  the  highest  in  the  sector,  and Catcha  Media  (BUY;  FV:  RM0.77),  which  we believe is the country's best proxy to tap into the internet media segment.

Tepid  adex  growth  in  3QCY12.  The  newspaper  segment  remained  Malaysia's no. 1  advertising  medium with a 51.2% share of total adex in 3QCY12. For the second consecutive quarter, FTA TV continued to gain ground at the expense of the former, bringing its adex share up to 38.3% (+136bps y-o-y). We believe this is in conjunction with the London Olympics 2012 and Hari Raya celebrations during the quarter which ticked up advertising  and  promotion  (A&P)  activities  in  the  segment.  Radio,  meanwhile, remained the nation's third core platform with 5.1% share. Overall adex only grew at a modest 2.0% y-o-y in 3QCY12, falling behind our expectations.

9MCY12 numbers missed expectations. In 1H, we were optimistic on the sector, given that adex numbers tend to be stronger in 2H (peaking in 4Q). However, 3Q numbers were disappointing, muting 9MCY12 growth at 0.2% y-o-y and missed our forecast of 2x OSK's CY12 GDP growth estimate of 5.2%.

English  papers  still  lagging.  In  the  newspaper  space,  the  market  share  trend  remains  largely  the  same whereby Bahasa Malaysia (BM) and Chinese publications continued to leech market shares off their English counterpart. The BM and Chinese segments grew by 1.1% and 1.8% y-o-y respectively in 3QCY12 while the English segment contracted 4.6% y-o-y, in line with our prior view that English-literate readers are becoming increasingly  fond  of  accessing  the  web  for  news  flow.  Overall,  newspaper  adex  fell  0.9%  y-o-y  in  3QCY12 (9MCY12: -0.7% y-o-y).

Media  Prima  and  MCIL  continue  to  expand  market  share.  Star  Publications  continued  to  dim,  losing market share to both Media Prima and MCIL in 3QCY12. Led by Harian Metro (+19.5% y-o-y), Media Prima's adex income expanded 6.7% y-o-y during the quarter. Media Chinese's numbers, however, were almost flat, growing  at  only  0.3%  y-o-y.  Persistent  drag  in  readership  and  saturated  advertising  space  mired  Star Publications, shrinking its adex income by 7.7% y-o-y and bringing down its adex share to 20.6% in 3QCY12.

Media Prima's TV segment disappoints.  Moving  on  to  the  FTA  TV  segment,  the  six  public  channels registered adex of RM843.5m in 3QCY12, up by a decent 5.8% y-o-y and 7.8% q-o-q. On a 9MCY12 basis however, TV's share of adex shed 0.4% y-o-y to close at RM2.21bn vis-''-vis our expectation of a 5% growth for the year. We attribute the shortfall to advertisers holding back their advertising budget in view of softening consumer  spending  amidst  increasing  political  uncertainty.  Consequently,  Media  Prima's  channels, particularly NTV7 and 8TV, registered a slide of 2.0% in adex share.

Downgrade to NEUTRAL. In view of the softening 9MCY12 adex numbers, we are downgrading our call on the media sector to a NEUTRAL for the time being as we believe the tepid growth trend would likely persist over  the  next  six  months.  While  4Q  is  usually  the  best  quarter  due  to  the  festive  season,  we  believe  adex growth  for  the  full  year  is  likely  to  be  below  our  latest  2012  GDP  forecast  of  5.2%.  Signs  of  weaknesses, especially  in  the  TV  segment,  led  us  to  believe  that  consumer  brands  will  likely  hold  back  their  advertising spending in view of uncertainties in the global economy as well as in domestic politics. Having said that, we believe stock selections could prove to be essential as we continue to see strength in  the core fundamentals of MCIL (BUY; FV: RM1.92). Media Prima (NEUTRAL; FV: RM2.43), meanwhile, is more prone to downward pressure on earnings given its exposure to the more-volatile TV segment. We make no changes to our stance on Star (NEUTRAL; FV: RM3.12), which we would recommend for its yield of over 6% p.a., the highest in the sector,  and  Catcha  Media  (BUY;  FV:  RM0.77),  which  we  believe  is  the  country's best  proxy  to  tap  into  the internet media segment.

Stock Recommendations 
   
MCIL  our  top  buy.  Although  MCIL's adex growth came in softer than what we had  earlier  expected,  we continue to like the company, for i) its management's stringent cost controls, ii) its relatively sturdy earnings base  focusing  solely  on  the  less-volatile  print  media  segment,  and  iii)  near-monopoly  presence  within  the Chinese publication universe. We continue to see strength in MCIL's Malaysian operations, which contribute over 80% to the group's consolidated profit. Coming off the bumper dividend of RM0.41 per share proposed earlier in June, the group's capital structure is better  optimized  now  with  a  forecasted  net  gearing  ratio  of 34.8% by FY14. We are forecasting a decent yield of 5.0% in FY14. On a side note, the proposed listing of the group's travel operations on the Hong Kong Stock Exchange would have  an insignificant impact on its operations.  Following  the  transition  of  coverage,  we  revisited  and  revamped  our  model  to  better  reflect MCIL's  financials  post  the  bumper  dividend  as  well  as  for  housekeeping  purposes.  With  that,  our  core earnings forecasts are upgraded by 3.0% for FY13 and 17.7% for FY14. Correspondingly, our FV is revised upward to RM1.92 based on an unchanged 13x CY13 PER. Maintain BUY.

Less keen on Media Prima. While Media Prima's print segment chalked in a decent 4.8% growth y-o-y in adex  share  as  of  9MCY12,  the  subpar  performance  in  its  TV  segment,  which  shed  2.0%  over  the  period, came in as a negative surprise. That said, we are taking a precautionary approach and slashing our FY12 and  FY13  earnings  forecasts  by  10.0%  and  7.7%  respectively,  with  our  recommendation  downgraded  to NEUTRAL  at  a  revised  FV  of  RM2.43  based  on  a  lower  FY13  PE  of  13x  (from  14.5x  previously).  Media Prima's valuation is on par with MCIL's despite the former being involved in the more lucrative TV segment. We are turning more cautious in view of potential downward earnings pressure going forward given that the advertising budget on TV is relatively more volatile. We foresee potential inflation risks post the 13th General Election  (which  now  seems  likely  to  only  happen  in  1HCY13)  should  there  be  any  subsidy  cuts  as  the Government attempts to balance its books, which could in turn impede consumer spending.

Faded shine from the Star. The subpar showing from Star's adex share justifies our neutral stance on the company. Some of the  headwinds that the group is facing include: i) the accelerated migration of  English-literate  readers  to internet  media,  ii)  dwindling  adex  share  on  a  declining  readership  base,  and  iii)  the narrowing advertising premium between English and non-English papers. With that, we took the opportunity to  revisit  our  model  and  trimmed  our  FY12  and  FY13  earnings  forecasts  by  2.6%  and  2.1%  respectively. Nonetheless, Star's decent balance sheet strength, with a net cash balance of RM0.31 per share as of June 2012  coupled  with  operating  cash  flows  of  over  RM250m  p.a.,  would  help  to  support  its  dividend  yield  at over  6%  p.a.  over  the  next  two  years.  Maintain  NEUTRAL  with  our  FV  revised  to  RM3.12  based  on  a revised 11.7x FY13 PE, pegging a 10% discount to MCIL's valuation due to its shrinking readership base. Should  its  management  succeed  in  turning  the  operations  of  some  of  its  latest  acquisitions  around,  we would revisit our recommendation in view of the group' new position as a media conglomerate. 

Catcha  Media  our  sole  internet  play.  Within  the  micro-cap  space,  we  see  Catcha  Media  (BUY,  FV RM0.77)  as  one  of  the  best  proxies  to  the  fastest-growing  media  segment  '  the  internet.  We  expect earnings  accretion  from  its  e-commerce  arm,  Haute  Avenue,  by  end  of  this  year  as  it  capitalizes  on  the expansion  of  the  portal's  healthy  membership  numbers  and  the  growing  trend  in internet shopping  among Malaysians.  Meanwhile,  the  listing  of  iCar  Asia  on  the  Australia  Stock  Exchange  would  help  it  unlock  the value  of  its  investment  in  the  company.  We  believe  this  regional  car  trading  portal  could  be  the  next iProperty in the making. Our BUY recommendation at RM0.77 FV is premised on 12x FY13 PE.

 Source: OSK