We are downgrading our Media sector call to UNDERWEIGHT. Two major events in 2014 namely FIFA World Cup and Visit Malaysia could help boost consumer sentiment, but these feel-good factors could potentially be dampened by the on-going subsidies rationalization plan. While we are keeping our total gross adex growth of +6.8% YoY (or +2.9% stripping off the Pay-TV segment contribution) in CY14, there is a potential downward revision should the negative impact come in worse than our expectation. There is no change in our media companies’ earnings forecast. Nevertheless, we are downgrading our Media Chinese (MEDIAC) call to UNDERPERFORM with a lower target price of RM0.94 (from RM1.13 previously) after reducing the targeted FY15 PER to 10x (5-year average PER) from 12.0x (+0.5x SD) previously in view of the challenging adex outlook and lack of key re-rating catalyst. We reiterate our MARKET PERFORM call on ASTRO (TP: RM3.10) and maintain our UNDERPERFORM ratings on both Media Prima (MEDIA, TP: RM2.64) and Star Publications (STAR, TP: RM2.00) due to their limited capital upside.

3QCY13 results snapshot. Media companies generally posted decent 3QCY13 results that generally came in within our estimates. STAR was the only company showing some mild improvement due mainly to its higher event segment contribution and lower operating costs. Despite the improvement, our cautious mode remains unchanged as we believe its advertisement outlook will continue to be challenging as a result of lacklustre newspaper circulation growth in the English segment. On top of that, the group’s voluntary separation scheme (which will cost c. RM38m) to streamline its work force in FY14 will likely cap its near-term profitability. Astro, meanwhile, is expected to post decent 3Q14 results in mid-December. Nevertheless, the rising cost environment could potentially drag consumer sentiment lower and thus leading to a lower Pay-TV net adds and ARPU going forward.

YTD November gross adex improved to RM12.8b (+19.9% YoY), led by the continued strong TV segment adex contribution (33.8% YoY to RM7.2b). On closer analysis, the TV segment was mainly boosted by the strong Pay-TV adex, which soared 69.8% YoY (to RM4.4b as a result of more channels) as compared to the minuscule 0.8% YoY growth in the FTA-TV segment. Stripping off the additional channels' effect, the Pay-TV segment only grew by 20.7% YoY to RM2.8b as of YTD November. Meanwhile, should we exclude the Pay-TV segment, the YTD November total gross adex was merely higher by +2.8% YoY (in-line with our full-year estimate of 2.6%) to RM13.4b. On a MoM basis, the total gross adex grew by a slower pace at 2.5% (vs. +6.0% in October), as a result of a moderate growth in the key segments albeit 4Q being the traditional strong quarter for ads spend. Unlike historical adex spending trend, where advertisers tend to escalate their expenditure and thus leading to a gradually stronger MoM growth, the current 4QCY13 seems to be an exception given that total gross adex only grew by 2.5% MoM in November. We believe the slower growth was due to the lacklustre consumer sentiment affected by a series of subsidies rationalization plans.

Feel good factors may be offset by the on-going subsidies rationalisation plan. The FIFA World Cup and Visit Malaysia in 2014 may provide some positive lift to the consumer sentiment. These feel-good factors, however, could potentially be offset by: (i) the escalating cost of living (spurred mainly by the on-going subsidies rationalisation plan) and (ii) further stringent measures by Bank Negara Malaysia to cool the property sector (leading a potential slowdown in property projects launches and ads spend) and thus dampening overall consumer sentiment and causing advertisers to turn more cautious.

1Q14 is expected to be lacklustre, in view of the absence of key events and seasonality factor where advertisers tend to conserve their A&P budget during the first two months of a new year to renegotiate new advertisement rates. The traditional Chinese New Year festival could provide some short-term uplift to the ads spend, but the rising living cost environment could neutralise the feel good factor.

Key events to watch in the 1Q14. For the print segment, the newsprint anti-dumping policy (from Canada, Indonesia, South Korea, the Philippines and the U.S.) is due for a review. Should there is any reduction or termination of the abovementioned anti-dumping policy, this could provide some downward pressures to the domestic newsprint price and thus benefiting the incumbents. For the TV segment, any solid progress from the upcoming announcement of the DTTB project could move the segment into a new era, especially the PTV segment.

Source: Kenanga