We continued to maintain our UNDERWEIGHT rating on the media sector. The adverse spill-over effect from the MH17 tragedy led to gross adex deteriorating for a second consecutive month in August (-7.1% MoM) and narrowing the YTD growth to 9.9% YoY (vs. 11.3% in YTD-July). Moving forward, we believe the adex sentiment would continue to remain cloudy in view of: (i) potential interest rate hike, (ii) persistent high inflation rate, and (iii) on-going subsidy rationalisation plans. Having said that, the traditional stronger ads spend in 4Q could provide some cheer to the overall gloomy adex sentiment. We leave our CY14 total gross adex growth forecast unchanged for now at 6.8% YoY (or 2.9% after stripping off the Pay-TV segment contribution) and see more room to upgrade should September’s gross adex resume its growth pace. Having said that, the net earnings impact to media companies will be limited due to the higher discount rates. 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 Media Chinese (MEDIAC, TP: RM0.81). We maintained our UNDERPERFORM call on ASTRO (TP: RM3.10) pending their upcoming 2Q15 results release tonight.

August’s gross adex retreated again, at -7.1% MoM (vs. -9.0% MoM in July) to RM1.2b. The weak August’s gross adex (on a MoM basis), we believe, was mainly dampened by the spill-over effect of the MH17 tragedy as a result of low-profile/cancellations of Hari Raya open house celebrations last month by both the corporates as well as government agencies. On top of that, the yearly National Day celebrations were also toned down this year as a mark of respect to MH17 and MH370 which contributed to the gross adex pullback for two consecutive months. All the media segments deteriorated in August (except the In-store segment (+9.6% MoM)) of which the Newspaper segment declined by -11.7% MoM followed by the Pay TV (-3.5% MoM) and Terrestrial TV (-3.4% MoM) segments.

On YTD-August basis, the total gross adex climbed at a slower space to RM9.1b (9.9% vs. +11.3% recorded in YTD-July). The growth was mainly fuelled by higher contribution from the Pay-TV (16.5%), Newspaper (6.5%) and FTA (6.5%) segments. In-store advertising, meanwhile, continued to gain traction and grow 11.2% YoY to RM98.5m. Note that, In-store advertising is generally located within supermarkets, or convenience stores with in-store displays that come in a variety of forms (i.e. shopping cart panels, above-aisle and etc.). Stripping off the Pay-TV segment contribution, the YTD-July gross adex merely improved by +6.2% YoY.

The YTD Pay TV gross adex narrowed its growth to +16.5% YoY to RM3.4b. The growth rate, however, is still above the FTA TV segment, which merely added +6.5% YoY. On a MoM basis, similar to other media type players, Pay-TV and FTA segments gross adex declined 3.5% and 3.4%, respectively. MEDIA’s August gross TV adex, meanwhile, deteriorated by 4.6% MoM (or +7.2% YoY) to RM223m, bringing its YTD-August gross ads revenue to RM1.8b (+3.6% YoY). Astro’s TV adex, meanwhile, was lower by 3.5% to RM425m in August, expanding its YTD gross adex to RM3.4b (+16.5% YoY).

Newspaper YTD-August gross adex improved 6.5% YoY to RM3.1b, mainly driven by the higher performance in the English segment (+21.4% YoY) but partially offset by the relative flat YoY growth in BM (+0.3% YoY) and lower performance in the Chinese segment (-4.0% YoY). Notably, the BM segment gross ads plunged 32.3% MoM, no thanks to lower contribution from Kosmo! (-61% MoM) and Berita Harian (-32% MoM), where we believe the lack of government ads spend is one of the factor. The higher YTD growth in the English segment was mainly fuelled by STAR (+48% YoY), New Strait Time (+16% YoY) and The Sun (+13% YoY) on higher ads revenue spurred by the higher discount rate. MEDIAC is the only print player which showed positive growth of 9.8% MoM in August while STAR and NSTP suffered a decline of 1.3% and 22.5%, respectively.

Gloomy adex outlook remains. Moving forward, our gloomy view on the sector’s outlook remains unchanged in view of: (i) potential interest rate hike in November which, 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, and (iii) on-going subsidy rationalisation plans, where the market is expecting another petrol price hike in the coming months. These negative sentiments coupled with the on-going subsidy rationalisation plans will likely dampen the already weak ads spending, moving forward.

Source: Kenanga