Our UNDERWEIGHT call on the media sector remains unchanged in view of the on-going subsidy rationalization which will continue to weigh on consumer sentiment. High dividend yield appears to be the only attractive investment angle for the sector in view of the gloomy adex outlook. Although the dividend yield is in-line with the historical trend, it outpaced the benchmark-index dividend yield. GST implementation, meanwhile, could potentially lead to a hike in the newspaper cover price but expected to have muted impact on the TV players. Having said that, the sector’s ads spend is likely to climb prior to the GST implementation but expected to soften moving forward in tandem with weaken prospect in private consumption. Meanwhile, the upcoming DTTB rollout is not expected to pose any immediate threat to MEDIA’s TV segment given that the latter is currently sitting on massive local contents which management believes will be the key to success in the local FTA TV playing field. We reiterate our UNDERPERFORM calls on Star Publications (STAR, TP: RM2.44); Media Chinese (MEDIAC, TP: RM0.81); and ASTRO (TP: RM3.10). Media Prima (MEDIA), meanwhile, target price has been lowered to RM2.33 (from RM2.53 previously) after revised the targeted FY15 PER to 13.7x (from 15.0x previously) in view of the gloomy adex outlook moving forward. Its MARKET PERFORM call, however, remain unchanged.

YTD-August 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. Stripping off the Pay-TV segment contribution, the YTD-August gross adex merely improved by +6.2% YoY. While we are keeping our CY14 total gross adex growth forecast unchanged at 6.8% YoY (or 2.9% after stripping off the Pay-TV segment contribution), we see rooms for upgrade should September’s gross adex resume its growth pace. Having said that, the net earnings impact to media companies would be limited due to the higher discount rates.

Dividend yield – higher than FBMKLCI but in-line with the historical trend. High dividend yield appears the only investment merit in the sector in view of the gloomy adex outlook. The sector is currently trading at an average dividend yield of 5.5% for both FY14E and FY15E (Figure 1), which is not far-off as compared to the industry’s 3-year historical average dividend yield of 6.2% but clearly outpacing the benchmark-index of 3.4%.

Impact of GST implementation. While there is a likelihood ads spend could potentially climb (especially for durable goods) prior the 6% GST implementation, the country’s private consumption is expected to weaken from 2Q15 onwards (as a result of the adjustment period) and thus, negatively affecting the ads spend sentiment. On the print side, newspaper cover price may likely to be hiked should the item exclude from the tax-exempted list and incumbents decide to pass-through the tax. No earnings impact is expected should the readers’ reading behaviour and circulation numbers remain unchanged. For the TV segment, we do not expect any material impact operationally.

MyTV plans to offer service from 2Q15, according to recent press. The company will be launching five core services (namely, TV and radio (both accessible via DTTB broadcast), connected services, transaction commerce and soft services (through broadband) for the digital terrestrial television (DTTB) switchover in 2Q15. While we concur with MEDIA’s view that there is no immediate threat to its TV segment, the group is likely to face more competition (in terms of ads spend) over the mid-to-long-term as a result of more digital channels being created once digitalised. Generally speaking, one analogue channel could offer 6-8 channels under the digital format. Despite expecting escalating competition moving forward, MEDIA believes that rich local contents are still the key to success in the local FTA TV segment playing field. With 75k hours local contents stored in its library, MEDIA intends to become the most preferred content provider going forward.

Gloomy adex outlook remains. 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 plan, where the market is expecting another petrol price hike in coming months. These negative sentiments coupled with the ongoing subsidy rationalisation will likely dampen the already weak ads spend, moving forward.

2QCY14 results snapshot. The sector incumbents' 2QCY14 results were generally below expectation, except STAR, which was mainly supported by its print (as a result of higher wrapping ads revenue) and new media on the back of higher margins. Meanwhile, both MEDIA and MEDIAC have recorded lower-than-expected 2QCY14 results due mainly to the lower advertising revenue coupled with higher operating costs. On the other hand, ASTRO’s 1H15 results came in within expectation, thanks to the better contribution from ‘other revenue’ segment as a result of better monetization on the major eventful sports and movie contents. STAR is the only company that gave a dividend surprise (1H14: 9.0 sen vs. 1H13: 6.0 sen) during the quarter.

Source: Kenanga