We reiterated our UNDERWEIGHT call on the media sector which was badly hit by the MH17 tragedy in July with total gross adex deteriorating by 9% MoM (or -1.4% YoY) and narrowing the YTD growth to 11.3% YoY (vs. 13.6% in YTD-June). Moving forward, we believe the adex sentiment would remain cloudy in view of: (i) another potential interest rate hike, (ii) persistent high inflation rate, and (iii) on-going subsidy rationalisation plans. These negative sentiments coupled with the spill-over effect of the MH17 tragedy could continue dampening the already weak ads spend moving forward. We leave our CY14 total gross adex growth forecast unchanged at 6.8% YoY (or 2.9% after stripping off the Pay-TV segment contribution). We reiterate our MARKET PERFORM call on Media Prima (MEDIA, TP: RM2.53) while keeping our UNDERPERFORM rating on both Star Publications (STAR, TP: RM2.44) and Astro (TP: RM3.10). We maintained our MARKET PERFORM call on Media Chinese Intl’ (MEDIAC) with an unchanged target price at RM0.92 for now, pending the upcoming 1Q15 result release on 28th of August.

July’s gross adex retreated 9.0% MoM (vs. +6.1% MoM in June) to RM1.2b. We believe the badly hit July’s gross adex (on a MoM basis) was mainly triggered by the MH17 tragedy, where adex sentiment was dampened as advertisers (especially the travel-related sectors) turned muted after the disaster. All the media segments deteriorated in July with the Pay-TV segment taking the lead (-13.7% MoM) followed by the Terrestrial TV (-6.5% MoM) and newspaper (-6.2% MoM) segments. Moving forward, we believe the sector’s outlook remains gloomy in view of: (i) another potential interest rate hike in September following a better-than-expected 2Q14 GDP announced by BNM last week. The interest rate hike, if materialised, would increase the cost of funding as well as lowering the consumer purchasing power and subsequently reduce advertiser's appetite in ads spend, (ii) persistent high inflation rate (where the country’s CPI has stayed above the 3.0% mark for seven consecutive months and recorded 3.3% in June), and (iii) on-going subsidy rationalisation plans, where the market is expecting another petrol price hike in coming months. These negative sentiments coupled with the on-going subsidy rationalisation plans will likely dampen the already weak ads spend, moving forward.

On YTD-July basis, the total gross adex climbed at a slower space to RM8.0b (+11.3% YoY vs. +13.6% recorded in YTDJune). The growth was mainly fuelled by higher contribution from the Pay-TV (18.9%), Newspaper (8.7%) and FTA (5.7%) segments. Stripping off the Pay-TV segment contribution, the YTD-July gross adex merely improved by 7.1% YoY.

Newspaper YTD July’s gross adex climbed 8.7% YoY to RM2.7b mainly driven by the higher performance in the English (+25.4% YoY) and BM segments (+4.0% YoY) but partially offset by the sluggish performance in the Chinese segment (-4.6% YoY). The higher growth in English segment, we believe, was mainly due to different revenue computation as well as escalating discount rate, thus leading to the growth rate appearing somehow exaggerated. All the newspaper players under our coverage suffered a MoM decline in July with MEDIAC taking the lead (-13.9%), followed by STAR (-12.3%) and NSTP (-2.0%).

The YTD Pay TV gross adex continued to show a double-digit growth of 18.9% YoY to RM3.0b at the expense of FTA TV, which merely added only 5.7% YoY. On a MoM basis, similar to other media type players, Pay-TV and FTA segments gross adex declined 13.7% and 6.5%, respectively. MEDIA’s July gross TV adex, meanwhile, deteriorated by 8.2% MoM (or -1.9% YoY) to RM233m while Astro’s TV adex was lower by 13.7% to RM440m.

Gloomy adex outlook in August amid MH17 tragedy. The spill-over effect of the MH17 tragedy, which happened on 17 July 2014, is expected to linger in August, judging from the persistent low-profile/cancellation of Hari Raya open house celebrations by both the corporates as well as the government agencies. Meanwhile, we understand that the traditionalNational Day celebration (i.e. Merdeka eve countdown, entertainment and fireworks display) will also be toned down this year as a mark of respect to MH17 and MH370, thus suggesting lower ads spend moving forward.

Source: Kenanga