We reiterate our NEUTRAL view on the Media sector. All the media companies are expected to record better 2QCY13 results as compared to the prior quarter, underpinned by (i) the General Election boom; and (ii) lower base effect in 13 1QCY13.  Meanwhile, we also revisit our key assumptions to align with our inhouse latest economic data estimates (for both the GDP and currency exchange) as well as the latest newsprint price trend. Adex-wise, we have revised our fullyear adex growth rate to 17.5% (from 8.0%) after the YTD June gross adex soared  by  18.3%  YoY  as  a  result  of  the strong Pay-TV segment contribution. However, our full-year adex growth rate (Ex-Pay TV segment) has been lowered slightly to 2.1% (from 2.3% previously) after taking the sluggish YTD June gross adex growth of 1.6% YoY into the consideration. Our new assumptions stated above have led us to lower our FY13-FY14 earnings estimates for Star Publications (“STAR”) and Media Prima (“MEDIA”) by -2.2% to -5.8% and -1.7% to -5.2%, respectively. Meanwhile, our Media Chinese International’s (“MEDIAC”) FY14-FY15 net profit forecasts have also been lowered by -2.5% to -4.9% but we raised Astro Malaysian Holding’s (“ASTRO”) FY14-FY15 earnings by +2.4% to +3.5%, respectively. Post-revision, we  raised our ASTRO DCF-derived target price to RM3.31 (from RM3.29 previously) and maintain the OUTPERFORM call. Meanwhile, our STAR, MEDIAC and MEDIA target prices have been cut to RM2.73; RM1.21 and RM2.65 (from RM2.87; RM1.23 and RM2.72 previously), based on unchanged targeted FY14 PERs of 12.6x, 12.0x and 16.4x, respectively. Our MARKET PERFORM recommendation on STAR, MEDIAC and MEDIA, however, remained unchanged. 

Expecting all media companies to record better 2QCY13 results, thanks to the 13 General  Election  campaign  advertisements  boom  as  well  as  lower  base  effects  in  1QCY13 since most of the advertisers were adopting  a wait-and-see attitude prior to the general election.  We expect STAR, which has scheduled to release its 2Q13 results this week, to report revenue at c.RM246m (+12% QoQ or -18% YoY) with a net profit of c.RM37m (+42% QoQ; -16% YoY). Meanwhile, for MEDIAC, which is tentatively set to announce its 1QFY14 th result on 28^th August, turnover should come in at c.USD120m (+9% QoQ or -3% YoY) with a net profit of c.USD14m (+4% QoQ  or +9% YoY). On the other hand,  MEDIA’s 2QCY13 revenue is likely to come in at c.RM460m (+26% QoQ or 3% YoY) while its bottom line is expected to climb by >100% QoQ (or 2% YoY) to c.RM58m. We understand that the group is tentatively set to release its 2QCY13 result on 28^th August.

Annual adex growth rate for CY13 increased but lowered for CY14. In view that the YTD June gross adex which soared 18.3% YoY had far exceeded our conservative 8% targeted full-year gross adex forecast, we have revised our estimate to 17.5% after raising the Pay-TV segment contribution. Moving on to CY14, we have, however, lowered the annual adex growth rate to 6.8% (from 9.0% previously) after considering the potentially softer consumer spending sentiment on the impending subsidy rationalization plan and possible GST implementation. 

Newsprint price is expected to be steady in the 2H13. Newsprint price, the biggest cost component for print media, has continued to hover at about USD590-USD620/MT range since the beginning of the year. Going forward, all the print players are expecting the newsprint prices to maintain at the current level in view of the steady global demand supply balance which inhibits further increases. 

Fine-tuning our key earnings forecast assumptions. We have revised the following key earnings' assumptions in our financial models for all media companies under our coverage as follows; (i) Fine-tuned CY13 and CY14 GDP growth rates to 5.0% and 5.25% from 4.7% and 5.3% previously, (ii) Raised CY13 targeted adex growth rates to 17.5% (from 8.0% previously) while lowering CY14 adex forecast from 9.0% to 6.8%; (iii) Lowering newsprint cost for all the print media incumbents; and (iv) Lowering currency forecast where we expect RM to further depreciate against US Dollar in both CY13 and CY14.  

YTD June gross adex advanced to RM6.0b (+18.3%) according to Nielsen.  The strong YTD adex growth continued to be led by higher contribution from the TV  segment such as Pay-TV (+71.8% YoY) and FTA (+7.1% YoY). However, newspaper gross adex was relatively sluggish, declining slightly by -0.1% to RM2.1b. The stronger YTD Pay-TV segment was mainly driven by an additional 15 channels (to 27 channels) being gradually included into Nielsen’s Pay-TV segment portfolio since July 2012. Stripping off the additional channels' effect, the Pay-TV segment only grew +13.5% YoY to RM1.38b as of YTD June. Meanwhile, should we exclude the Pay-TV segment, the YTD June total gross adex was only up by 1.6% to RM3.95b. On a MoM basis, the total gross adex grew by +3.5% (vs. +15.3% in May), thanks to continued growth in the Pay-TV segment, mainly led by Astro RIA, Astro Warna and Astro Supersports channels. On market share, Pay-TV continued to grow its portion to 34.5% (vs. 23.7% a year ago) at the expense of the newspaper (34.3% vs. 40.6%), FTA TV (24.2% vs. 26.8% previously) and radio (3.6% vs. 4.0%).

Newspaper YTD June gross adex remains sluggish at RM1.8b (+0.2% YoY), mainly supported by higher adex growth in the Chinese segment (+9.0% YoY) but largely offset by the weaker performance in both the English (-3.1% YoY) as well as BM (-2.7% YoY) segments. We opine that the continued weaker adex momentum, to a certain extent, in the English newspaper segment is due to the on-going print-to-digital migration trend. Meanwhile, the relatively strong gross adex in the Chinese segment was mainly supported by its unique cultural-related advertisements (i.e. congratulatory note, condolence and etc.) and lesser print-to-digital migration impact (as compared to the English newspapers) since the majority of Chinese newspaper readers still prefer the traditional print delivery.

Total YTD TV gross adex continued to strengthen by 37.5% YoY to RM3.5b, thanks to the higher contributions from both the Pay-TV segment (+71.7% YoY) and FTA-TV segment (+7.1% YoY). All the FTA channels experienced higher gross adex revenues except TV2, which YTD June revenue dipped by 16% YoY to RM113m. On a MoM basis, FTA-TV adex was up by 5.5% mainly led by higher TV3 gross adex contribution. 

MEDIA’s 2QCY13 gross TV adex climbed by 19.5% QoQ (or 4.5% YoY) to RM710.6m, thanks to the strong double digit quarter-to-quarter growth in all channels except 8TV, which gross adex revenue was only higher by 7% as compared to the preceding quarter. We believe the strong MEDIA’s 2QCY13 gross adex was mainly driven by (i) the 13th General Election (“GE”) campaign advertisements; and (ii) low base effects in 1QCY13 since most of the advertisers were adopting a waitand-see attitude prior to the GE. By assuming a targeted 69% discount rate and a 20% royalty fee to MEDIA’s 2QCY13 gross adex TV, we forecast the group’s TV segment net revenue at c.RM201m (46.1% QoQ or 6.7% YoY) for the quarter.

Newsprint inventory remained largely unchanged but with a lower average price. STAR continued to have the highest newsprint inventory in the industry with c.15-16 months of supply at an average price of less than USD650/MT (vs. c.16 months @ USD650/MT in June). Meanwhile, MEDIAC’s newsprint inventory remained unchanged at 6-9 months while its average cost is estimated at about USD650/MT, a similar level recorded in May. On the other hand, MEDIA’s newsprint inventory is now lower at 3 months (vs. 4-5 months in 1Q) with an unchanged average cost of c.USD645/MT.  

No anti-dumping investigation on import of newsprint rolls.  The government has decided to terminate investigations on the import of newsprint rolls from four European countries namely Belgium, Germany, Sweden and United Kingdom into Malaysia in August. The authority explained that the termination was in the interest of the public. To recap, the investigation was initiated on April  5 after the investigating authority received a petition from Malaysian Newsprint Industries S/B which claimed that the imports of newsprints into Malaysia from these countries had caused serious damage to the domestic industry. 

Fine-tuning our GDP and currency exchange forecast. We have revised our CY13-CY14 GDP forecasts to align with our latest in-house economic team’s estimates. Post-revision, our CY13-CY14 GDP forecasts now stands at 5.00% and 5.25%, respectively, as compared to  4.70% and 5.30% previously. Meanwhile,  we have also revised our CY13-CY14 USD/RM currency forecast to RM3.05 and RM3.01 (from RM3.01 and RM2.84), respectively, in line with our latest in-house estimates.  

Revised our newsprint price assumptions. We have also lowered our newsprint price assumption for all the print players after taking its recent price movement, which has  been hovering at c.USD590-USD620/MT since January, into consideration. We have reduced STAR CY13-CY14 targeted newsprint costs to USD645/MT and USD630/MT (from USD650/MT previously). Similarly, our MEDIAC’s FY14-FY15 targeted newsprint price has also been cut to USD650/MT and USD630/MT, respectively, from USD680/MT formerly. Meanwhile, MEDIA’s FY13 newsprint price has been revised lower to USD645/MT (from USD650/MT in FY13) while the FY14 newsprint price is maintained at USD650/MT.

Sensitivity analysis for our currency forecast.  There is a potential risk that we may have to review our forex assumption again in the near term in view of the recent higher volatility in the forex market caused by the revision of the country’s sovereign rating. Based on our study, for every 10 sen change in our CY13-CY14 USD/RM forex assumption, the earnings of STAR, MEDIAC and MEDIA will be impacted by ±2.2%, ±6.5% and ±2.0%, respectively. The impact to MEDIAC is relatively higher as compared to its peers is due mainly to its higher newsprint consumption requirement of c. 160k-170k MT per annum as compared to about 75k MT for STAR and 87k MT for MEDIA, based on our estimates.

Earnings revisions. We have revised all the media companies’ earnings forecast following the review of our key earning assumptions. We have lowered our  STAR’s  FY13–FY14 net profit forecasts by  -2.2% and -5.8% to RM147.5m and RM158.5m, respectively.  MEDIA’s FY13-FY14 earnings, meanwhile, have been reduced to RM195.7m (-1.7%) and RM198.1m (-5.2%), respectively. Similarly, MEDIAC’s FY14-FY15 earnings have also been cut to RM170.2 (-2.5%) and RM163.8m (-4.9%), respectively. 

ASTRO is relatively insensitive to the revision of our core assumptions abovementioned; despite a larger upward revision in our Pay-TV gross adex assumption, given that the total adex revenue only accounted for c.11% of its FY14E-FY15E revenue estimates. Post-revision, our ASTRO’s FY14-FY15 earnings estimates have been increased by c.2-4%, respectively, driven mainly by the higher gross adex growth assumption in the Pay-TV segment. Subsequently, our DCF-derived TP is also marginally increased, from RM3.29 to RM3.31. No change in our OUTPERFORM recommendation on ASTRO as we continue to believe that its outlook is buoyant, underpinned by; (i) decent subscriber growth on the back of encouraging subscription for Maxis-Astro IPTV offering and its pay-TV services; and (ii) sustainable ARPU growth driven by increasing take-up in value-added services.

Source: Kenanga