We are keeping our UNDERWEIGHT rating on the media sector. The country’s gross adex has resumed its downward trend in October (-3.0% MoM vs. 12.5% MoM growth in September as a result of the low base effect) and narrowed its YTD-October growth to 7.8% YoY. The dip in October’s gross adex was mainly led by the lower contribution from the newspaper segment, where ad spends are now focused on the segment leader rather than the number two player (i.e. Berita Harian in the BM segment; and NST in the English segment) in each segment. The uninspiring YTD adex performance has led us continue keeping our bearish view for the sector outlook, where we believe the adex sentiment would continue to be dampened by: (i) the recent petrol price hike, (ii) persistently high inflation rate, and (iii) on-going subsidy rationalisation plans. Meanwhile, on the corporates earnings front, all the print players have reported negative gross adex revenue growth in 3QCY14, suggesting a lower quarterly earnings report card ahead. We leave our media companies’ FY14-FY15 earnings forecasts as well as target prices unchanged for now, pending their upcoming 3QCY14 results release. We reiterate our MARKET PERFORM call on Media Prima (MEDIA, TP: RM1.80) and UNDERPERFORM ratings on Star Publications (STAR, TP:RM2.44); Media Chinese (MEDIAC, TP: RM0.81) and ASTRO (TP: RM3.10).

October’s gross adex softened (-3.0% MoM) and …. Unlike the positive MoM growth in September’s gross adex (due mainly to the low base effect), the adex sentiment has turned negative again in October (-3.0% MoM) as a result of the poor newspaper segment performance (-15.3% MoM). The dip was mainly led by the weak BM (-27% MoM) and English newspapers (-15% MoM) segments, where Berita Harian (-52% MoM) and New Straits Time (-33% MoM) experienced sharp plunges on a MoM basis. The key reason, we believe, was mainly due to the change in advertisers’ marketing strategies given the challenging time ahead. Apart from lowering the overall adspend, advertisers also tend to focus on advertising in the segment leader (i.e. Harian Metro in the BM segment; The STAR in the English segment) rather than the number 2 player in the respective segments. The FTA TV segment gross adex, meanwhile, was also lower by 0.9% MoM in October, no thanks to the lower adex contribution from 8TV, TV9 and TV1. The Pay TV, however, improved to RM510m (+6.2% MoM) as a result of an additional new channel (AXN HD) added into the portfolio. Stripping off the additional channel contribution, the Pay TV segment gross adex only improved 3.2% MoM in October.

….narrowed its YTD-October to 7.8% (vs. 9.3% in YTD-September basis). The YTD-October growth was mainly fuelled by higher contribution from the Pay-TV (13.6%), Newspaper (4.3%) and FTA (5.1%) segments, while the Radio segment (being the number 4 higher contribution to the overall adex) remains stagnant and improved merely by 0.7%. In-store advertising, meanwhile, continued to gain traction and grow 15.1% YoY to RM127m. 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-October gross adex merely improved by +4.6% YoY to RM7.2b.

A challenging 3QCY14. The recent announced MEDIA’s 3QCY14 result had failed to meet market expectations, where consensus FY14 earnings estimate has been lowered by 28% post the result release. Apart of the higher-than-expected direct costs as well as overheads costs, the disappointing MEDIA’s 3QCY14 results were also dampened by the poor adex revenue performance where the group’s total gross adex was lowered by 13.8% YoY to RM444m. Based on our statistic, STAR’s gross print ads revenue reported a big quarterly dip of 7.4% QoQ (or -1.3% YoY) to RM284m in 3QCY14, followed by MEDIAC (-4.1% QoQ; -9.1% YoY to RM206m). As a result, there is a high likelihood for STAR and MEDIAC to release disappointing 3QCY14 report cards should no cost-cutting initiative was taken during the quarter.

Source: Kenanga