We reiterate our NEUTRAL view on the Media sector. The YTD February gross adex grew by 20.5% YoY (or +5.1% YoY should we exclude the Pay TV segment), thanks to higher contributions from both the FTA and Pay TV segments that were mainly led by the election boom catalyst as well as a higher Pay TV penetration rate. Going forward, TV gross adex is expected to remain on an uptrend path underpinned by a higher contribution from the Pay TV segment as a result of higher viewership, higher household penetration and a higher advertising discount rate. On the other hand, for print media, its adex growth performance is expected to be sluggish although the net earnings impact could be cushioned by a lower newsprint cost. We are maintaining our full-year CY13 adex annual growth rate of 8%, albeit the numbers would seem conservative given the strong double digit YoY growth during the first two months. Post-GE, there is a strong likelihood that the government may implement a subsidy rationalisation plan, which we believe will focus on fuel and food prices and this may potentially dampen the consumer and adex sentiments. Meanwhile, we believe that there could be a potential 10%-15% downside for media players’ share prices should there be any hiccups post the GE period. Media Chinese (“MEDIAC”, OP, TP: RM1.23) remains our top pick in the sector due to the more resilient Chinese adex outlook. Meanwhile, there could be some trading opportunities in STAR (OP, TP: RM2.94) given that the group’s PER valuation has dropped to a 6-year low coupled with its attractive dividend yield of about 7%. We reiterate our MARKET PERFORM calls, meanwhile, for both Media Prima (“MEDIA”, TP: RM2.31) and Astro (TP: RM3.10).

4QCY12 results snapshot. The media sector generally posted reasonable 4QCY12 results that came in within ours as well as the street’s estimates. STAR was the only company with its results coming in below expectations (after stripping off a RM90m land disposal gain) due to higher operating costs and the poor results at its event division. MEDIA and MEDIAC’s results were within expectations albeit their outlooks remained challenging.

The YTD February gross adex has increased by +20.5% YoY to RM1.7b according to Nielsen. The decent growth was mainly driven by Pay TV (+73.9%) and FTA TV (+17.0%) but was slightly offset by the marginally lower contribution from the Newspaper (-0.5%) segment. On a MoM basis, the total adex plunged by 13.3%, no thanks to the lower adex spending seen in most of the segments. The lower MoM growth was in line with ours as well as the market expectations given that advertisers tend to spend aggressively to meet their annual adex budget during the year-end and conserve their A&P budget in the first two months of the new year to renegotiate new advert rates. On market shares, Pay TV continued to grow its share to 32.3% (vs. 22.4% a year ago) at the expense of the shrinking market share in the newspaper segment (34.9% vs. 42.3% previously) and FTA TV segment (25.1% vs. 25.8% previously). We are keeping our full-year CY13 annual adex forecast of 8.0%.

Newsprint inventory remained largely unchanged but with a lower average price. Both STAR and MEDIA have kept their respective newsprint inventory levels unchanged since our last check in December. MEDIA has maintained its newsprint inventory of 4-5 months but with a lower average cost of USD610/MT vs. USD640/MT in late CY12. Similar, STAR remained as the highest in the industry in terms of newsprint inventory with a more than 12- month supply with an average cost of less than USD660/MT (vs. USD700/MT in December 2012). MEDIAC, meanwhile, is currently holding 6-8 months of newsprint inventory but with a similar average price of USD670/MT in contrast to 3 months ago.

Near-term floor valuations. While the upcoming 13th general election is widely anticipated by Malaysians in that there could be the potential emergence of a stronger two-coalition system of politics, any unanticipated election result may increase the market volatility in the post-election period, especially in the first trading day. We believe the industry incumbents’ near-term floor estimates will be at the levels when their current valuations fall by half or one standard deviation (“SD”). That said, we believe that should there be any hiccups in the post 13th GE period, the near-term floor for STAR should be at RM2.33 (-3SD, implying a FY13 PER of 10.5x); MEDIAC at RM1.00 (5-year average PER); MEDIA at RM2.00 (-0.5SD, implying a PER of 10.4x for FY13) and Astro at RM2.48 (CY13 EV/EBITDA of 9.0x).

Source: Kenanga