We reiterate our NEUTRAL view on the Media sector. The YTD August gross adex grew by +17.4% YoY to RM8.4b as the strong Pay-TV adex surge of +73.0% YoY were offset by the minuscule 0.8% YoY growth in both FTA-TV segment and Newspaper segment, respectively. While the 4Q of each calendar year normally records the highest quarterly adex (as advertisers traditionally will then spend aggressively to meet their annual adex budget coupled with the seasonal year-end festivities), the adex momentum this time around may face headwinds in light of the spill-over effect from the recent petrol price hike coupled with the government on-going subsidies rationalisation plan (thus dampening business as well as consumer sentiment). There is no change in our media companies’ earnings forecast for now as well as our full-year CY13 adex annual growth rate target of 17.5%. We are reiterating our MARKET PERFORM calls on Astro Malaysia Holdings (“ASTRO”, TP: RM3.14), and Media Chinese (“MEDIAC”, TP: RM1.19). Meanwhile, we are raising our Star Publications (“STAR”, TP: RM2.41) rating to MARKET PERFORM since the stock has retreated 13% followed our UNDERPERFORM call on 15-August and reached our target price. Similarly, we are downgrading Media Prima (“MEDIA”, TP: RM2.60) to UNDERPERFORM due to its limited capital upside.

2QCY13 results snapshot. Media companies generally posted reasonable 2QCY13 results that came in within our estimates. Despite the country’s 12th General Election being held during the quarter, its impact on the media sector companies was relatively muted. STAR was the only underperformer in the print media, no thanks to its higher-than-expected operating expenses coupled with the lacklustre newspaper circulation growth in the English segment as a result of the ongoing print-to-online migration. Astro, meanwhile, saw its performance dragged by: (i) slower consumer sentiment thus leading to lower pay TV net adds and (ii) higher marketing, distribution as well as administrative expenses.

The YTD August gross adex grew by +17.4% YoY to RM8.4b as the strong Pay-TV adex growth of 73.0% was offset by the minuscule 0.8% YoY growth in both FTA-TV segment and Newspaper segment, respectively. On a MoM basis, advertisers basically lost their appetite in August with lower adex growth seen, particularly in all the segments save for outdoor (+6.5%). We are maintaining our targeted 17.5% annual gross adex growth rate for CY13 as the YTD August gross adex came in within our expectations (made up of c.63% of the full year gross adex number). Stripping off the Pay-TV segment contribution, the YTD August total gross adex growth was flat YoY (vs. our 2.1% estimate for the full-year) to RM5.4b.

Subsidies rationalisation plan may dampen adex sentiment. While 4Q of each calendar year normally records the highest adex, the situation this time around could potentially face spill-over effects from the recent petrol price hike. Meanwhile, the ongoing government subsidies rationalisation plan may continue to push up the cost of living, at least in the short-term and thus dampening consumer sentiment going forward, causing advertisers to take a cautious stand.

Media players’ strategies centre on defending their turfs. On the TV front, we understand that FTA-TV players such as MEDIA will continue to invest in compelling quality content across the nation to retain its audience-viewership. To diversify its group earnings dependency away from the TV adex, the group will also leverage its content-creation capability by monetising its content library with aim to grow its consumer revenue (c.15% YTD). Meanwhile, we gather ASTRO’s strategy is to focus on growing its Pay-TV subscription revenue by up-selling its packages as well as its valueadded products and services. For the newspaper incumbents, we understand that STAR is still aiming to enrich its media portfolio and enhance its competence via various cost-cutting measures. MEDIAC, meanwhile, will continue to focus on defending its adex market share as well as improve its operational efficiency.

Newsprint cost should remain largely unchanged. Newsprint price, the biggest cost component for print media, has been hovering at the USD590-USD620/MT range since the beginning of the year. Going forward, all the print players are expecting newsprint prices to maintain at the current level in view of the steady global demand supply balance which inhibits further increases. Meanwhile for the newsprint inventory, STAR continued to hold the highest newsprint inventory with c.16 months of supply at an average price of below USD650/MT. Meanwhile, MEDIAC’s newsprint inventory remained unchanged at 6-8 months with an average cost of below c.USD650/MT. On the other hand, MEDIA’s newsprint inventory is now higher at 3-5 months (vs. 3 months in 2Q) with an unchanged average price of c.USD640/MT.

Source: Kenanga