A subdued 2012. Although the global environment failed to excite, Malaysia's economy grew quite robustly, thanks to strong domestic demand underpinned by the Economic Transformation Programme (ETP) and the rise in infrastructure projects. However, the media segment's growth was tepid as advertisers were cautious with spending during the year. Based on The Nielsen Co figures, 10M12 adex was flat y-o-y (+0.7%) given that the three core segments - i.e. newspaper, free-to-air (FTA) TV and radio - which together account for more than 90% of total adex, registered mediocre y-o-y growth of between -1% and +2%. We were indeed disappointed with this year's poor adex showing as we had earlier expected adex growth of 2x our house CY12 GDP forecast of 5.2%.

English segment continues to roll downhill. The market share trend in the newspaper space was status quo, as the BM and Chinese publications bit into the adex share of their English counterparts. For the first 10 months of the year, adex in the BM and Chinese segments grew 3% and 2% y-o-y respectively while that in the English segment contracted by 6% y-o-y. This phenomenon is not surprising as English-literate readers are becoming more tech-savvy and are increasingly accessing the web for news. Thus, based on company specifics, Star Publications was no doubt the biggest loser (-2% newspaper adex market share) while Media Prima and Media Chinese were the prime beneficiaries.

Encouraging numbers from cinema segment. To our surprise, FTA TV adex was tepid despite both the Euro 2012 and London Olympics being held this year while radio was also not particularly great as mentioned above. Although we were disappointed with the performance of the heavyweights, the adex growth chalked in by the cinema segment was astonishing, albeit coming from a low base (+63% y-o-y). We think advertisers are being pickier on the target audience to deliver and implant a more significant message across while conserving their coffers - advertising to the masses is pricier and may be ineffective.

Newsprint price stabilizes. Newsprint prices have been going sideways since late-2010. We expect a similar trend moving forward given the lethargic demand from the developed countries of US and Europe. This bodes well for newspaper publishers, for which newsprint comprises the largest cost component, at ~40% of COGS, as it smoothens out the volatility in expenses. We expect newsprint prices to hover at the current USD600-USD650/tonne level. Nevertheless, currency value plays a major role in determining this portion of costs, whereby the appreciation of the RM against the USD will translate into lower overall newsprint price, which is denominated in USD. This had been the case for the past few quarters.

Maintain NEUTRAL. Looking ahead to 2013, the sector is in great need of rerating catalysts. Uncertainties cloud both our domestic political scene as well as the global economy. Furthermore, there will be no major sporting events to spur adex growth next year. Hence, we are NEUTRAL on Media Prima given our caution on its exposure to the volatile TV segment, and Media Chinese, whose bottom-line will shrink after committing to RM500m worth of debts. Meanwhile, Star Publications is a SELL given that its printing business is facing a decline in English readership while its newly acquired businesses are still in their gestation. Similarly, Catcha Media's businesses are still at their infancy but we are NEUTRAL on the stock. Lastly, the only company in our media universe with a BUY recommendation is Astro, whose business differs from the above-mentioned companies as it adopts the pay-TV model, which could somewhat cushion the impact of adex slowdown.

Source: OSK