We reiterate our UNDERWEIGHT call on the media sector in view of the on-going subsidy rationalization and the upcoming GST implementation which could continue to weigh on consumer sentiment. High dividend yield appears to be the only attractive investment angle given the gloomy adex outlook. RISI is expecting the current newsprint price continue to stay low due to the cheap supply and slower demand. These positive impacts, however, are expected to be neutralised by the: (i) persistently weak Ringgit and (ii) higher newsprint cost after shifting to 42g (from 45g previously). We have lowered our Star Publications (STAR) and Media Prima (MEDIA) FY15E earnings by -1.5% and -0.5%, respectively, after adjusting our assumptions on: (i) USD/RM forex to RM3.43 (from RM3.22 previously) and (ii) newsprint price to USD600/MT (from USD630/MT previously). Our Media Chinese (MEDIAC)’s FY15E earnings, meanwhile, remain unchanged as we had adjusted the above-mentioned assumptions previously. We also take this opportunity to introduce our MEDIAC’s FY16E earnings forecast, where we expect the group’s NP to grow by 16.6% YoY, underpinned by its cost-saving initiatives and lower-base effect. Valuation-wise, in tandem with our mild earnings downgrades, we have lowered our target prices for STAR (MP) to RM2.26 (from RM2.29 previously) and MEDIA (MP) to RM1.78 (from RM1.80 previously). We reiterate our UNDERPERFORM calls on both ASTRO (TP: RM2.98) and MEDIAC, but with a lower target price on the latter to RM0.68 (from RM0.79 previously) after shifting our valuation base year to FY16 but with a lower targeted PER of 7.7x (from the average 5-year PER of 10.3x previously), representing a -1.0 Std. deviation below the 5-year mean, due to sluggish adex outlook.

YTD-November total gross adex narrowed to 6.0% (vs. our 6.8% forecast for the full-year) after posting a weak adspend in November (-3.8% MoM) as a result of the poor FTV segment (-5.7% MoM) and Pay TV segment performance (-7.0% MoM). Stripping off the Pay-TV segment contribution, the YTD-November gross adex merely improved by 2.9% YoY to RM7.9b (vs. our 2.9% YoY). The latest gross adex numbers also reassured our view that advertisers have changed their adspend behaviour. As part of lowering the overall adspend, advertisers also tend to focus on advertising in the segment leader rather than the alternative player in the respective segments. The trend is noticeable in both the newspaper and FTA TV segments.

Ringgit remains feeble against USD. The recent OPEC’s decision on keeping production targets unchanged has caused oil prices continuing to tumble and hit multi-year lows. The dip has a ripple effect on the next oil exporter like Malaysia, where the Ringgit has declined c.10% to RM3.476 since September. In view of the persistently weak Ringgit (against the USD), our in-house team of economist have revised their average 2015 target to RM3.4321 (from RM3.2247 previously), prompting us to adjust our media companies’ currency forecast accordingly.

Newsprint prices are expected to remain soft, according to RISI, due to cheap supply (from Russian producers) and slower demand. Although the current 45g newsprint prices have fallen to USD520-550/MT (vs. USD565-585/MT in 3Q14) range in 4Q14 as well as the industry players’ average newsprint cost of USD600/MT, our recent check with the industry players suggested that they were not rushing to raise their respective stockholding. This was due to the: (i) persistently weak Ringgit against USD and (ii) progressively shifting the 45g newsprint inventory to the higher-yield 42g newsprint. Note that, MEDIA, STAR and MEDIAC newsprint inventory are currently at 6.1/9.0/6.1 months, respectively, with an average cost of USD600/MT each. Having said that, should the incumbents resume their stocking mode, we believe the positive impact is likely to be neutralised by the persistently weak Ringgit as well as the higher 42g newsprint price (where the price is about 5%-10% higher than the 45g newsprint price). We have lowered our STAR and MEDIA FY15 newsprint cost assumptions to USD600/MT (from USD630/MT previously) while retaining our assumption for MEDIAC (at USD600/MT for FY15).

Gloomy adex outlook remains. Our gloomy view on the sector’s outlook remains unchanged in view of: (i) the persistently high inflation rate, and (ii) on-going subsidy rationalisation plans. On top of that, the upcoming GST implementation post April 2015 also expects to push up the inflation rate and thus lowering the purchasing power as well as advertisers’ adspend appetite. Having said that, we do not discount that the country’s adspend may spur by the potential GST fever in 1Q15, if materialise, but is expected to soften thereafter, bringing the total gross adex annual growth rate to 5.1% YoY in CY15 vs. 6.8% YoY a year ago.

3QCY14 results snapshot. The sector incumbents' 3QCY14 results were generally below expectation, especially the print media players (i.e. STAR, NST and MEDIAC) where earnings were dampened by the lower advertising revenue as well as the higher operating costs. The FTA TV incumbent (i.e. MEDIA), meanwhile, saw its net TV revenue weakened as a result of the slower adspend and higher discount rate. On the other hand, ASTRO’s 9M15 results also came in below expectations due to its slower net Pay-TV net adds and higher-than-expected cost of sales mainly due to higher professional fees paid for software installation. Looking towards the 4Q, while the 4Q of each calendar year is traditionally the strongest quarter, things could be different this time round as the adex sentiment has yet to show any meaningful recovery based on our channel check with the industry players, thus suggesting that the outlook remains challenging.

Source: Kenanga