We have raised our media sector rating to NEUTRAL (from UNDERWEIGHT previously) following the recent earnings and target price upgrade for ASTRO (TP: RM3.38) due to the latter’s resilient earnings despite higher cost of living environment. The country’s gross adex eased moderately by 0.6% MoM in February, suggesting that the potential pre-GST fever has yet to kick-in. Nevertheless, we still believe that there is a fair chance for the ad spends to pick up in March (due to the pre-GST fever, and the ‘last minute’ attitude adopted by the Malaysian public in general), especially for durable and luxury items. Decent dividend yield appears to be the only investment merit for the sector in view of the general gloomy adex outlook. There is no change to our media companies’ FY15-16E earnings as well as target prices. We reiterated our MARKET PERFORM call on Media Prima (MEDIA, TP: RM1.74); Media Chinese (MEDIAC, TP: RM0.68) and ASTRO while keeping our UNDERPERFORM rating on Star Publications (STAR, TP: RM2.26).

No pre-GST rally in ad spends seen yet. Nielsen media recently reported that the country’s gross adex has trended moderately lower by 0.6% MoM in February but climbed 15.0% YoY to RM1.0b. The moderate slower gross adex suggested that pre- GST fever has yet to materialise in February. Apart from that, we also believe that the mild adex decline in February was also caused by: (i) shorter working days as a result of Chinese New Year holidays, and (ii) advertisers’ tendencies to conserve A&P budget in the first two months of the new year to renegotiate new advert rates. The lower gross newspaper adex (-13.6% MoM) was the main culprit for the uninspiring gross adex performance in February. On a YoY basis, the double-digit growth in February’s gross adex was mainly fuelled by higher adex performance in all media types (except the Newspaper and FTA TV segment) coupled with lower base effect a year ago. On YTD-February basis, the total gross adex grew by 3.7% YoY to RM2.1b, thanks to the continuous strong Pay- TV segment (+17.6%) that partially cushioned the weaker performance of the Newspaper (-5.1%) and FTA (-6.6%) segments.

Stripping off the Pay-TV segment contribution, the YTD February gross adex contracted 4.7% YoY. Dividend yield – higher than FBMKLCI’s average. High dividend yield appears to be the only investment merit for the sector in view of the gloomy adex outlook. The sector is currently trading at an expected average dividend yield of between 6.5%-6.7% for FY15 and 6.5% for FY16 (please see overleaf for more details), which is slightly lower than the industry’s 3- year historical average of 7.9% but clearly outpacing the benchmark index’s 3.2%.

Gloomy adex outlook continues to stay. Moving forward, our gloomy view on the sector’s outlook remains where we believe the GST implementation and recent review of RON95 petrol price (from RM1.70 to RM1.95/little) are likely to push up the inflation rate and thus lowering the consumer purchasing power as well as advertisers’ adspend appetite. Nevertheless, we still believe there is a fair chance for the country’s ad spend to pick up in March due to the potential pre-GST fever, but expected to soften thereafter, bringing the total gross adex annual growth rate to 5.1% in CY15.

4QCY14 results review. The sector incumbents’ 4QCY14 results were generally mixed, where MEDIAC’s result came in within expectation while MEDIA failed to deliver. The latter was mainly due to: (i) lower-than-expected advertising revenue as a result of slower adspend, and (ii) the one-off mutual separation scheme expenses. Similarly, STAR’s result also underperformed with softer advertising revenue exacerbated by the one-off expenses of impairment losses. Astro’s FY15 results, on the other hand, came in within our, as well as the street’s, estimate. Nevertheless, the higher-than-expected DPS announced in 4Q15 (total 4.25 sen dividend) was a pleasant surprise. Moving forward, we understand that Astro is aiming to grow its revenue through: (i) monetarising its content capability, (ii) continuing to improve ARPU through product up selling, and (iii) optimising content cost.

Source: Kenanga