Our NEUTRAL stance on the media sector remains unchanged. May’s gross adex has improved by 9.9% MoM (as a result of the low base effect), bringing its YTD growth to 3.1% YoY. Despite a positive MoM growth, we believe it may just be a spurt due to the cautious consumer spending mode amid the rising cost of living. Having said that, we expect the adex sentiment to improve post the GST transition period to record an annual growth of 5.1% by end-CY15. 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. ASTRO (TP: RM3.38) is the only OUTPERFORM in the sector due to its resilience earnings and decent dividend yield. We reiterated our MARKET PERFORM call on MEDIA Prima (MEDIA, TP: RM1.74), Media Chinese (MEDIAC, TP: RM0.57) and Star Media (STAR, TP: RM2.49).

1QCY15 result review - seasonally low but within expectations. The sector incumbents’ seasonally weak 1QCY15 results were generally within expectations, albeit coming in at the lower-end of their respective historical 1Q performances. Weak adex revenue (as a result of cautious spending by both consumers and businesses due to the recent implementation of GST), and unfavorable forex, were the main common issues that faced by the incumbents during the quarter.

 May’s gross adex advanced 9.9% MoM (vs. -8.6% MoM in April), bringing its YTD growth to 3.1% YoY. The stronger performance in May’s gross adex on a MoM basis, we believe, was mainly due to the low base effect where April adex was hit by the cautious mode adopted during the first month of GST implementation. On top of that, to a certain extent, we also believe selective last-minute promotions (to clear the old inventories under the previous tax regime) also help to spur short-term spending. All the media types, except the Magazines segment (-5.0% MoM) recorded positive MoM growth in May with newspaper, FTA-TV, Radio and Cinema segments showing double-digit growth. On YTD May basis, the total gross adex grew 3.1% YoY (vs. YTD April of 4.2% YoY) to RM5.67b, thanks to the continuous strong Pay-TV (+19.5%), albeit partially offset by lower contribution from both the FTA-TV (-7.6%) and newspaper (-7.6%) segments.

Stripping off the Pay-TV segment contribution, the YTD May gross adex weakened by 6.6% YoY to RM3.2b. Positive adex sentiment may be short-lived. Despite recording a nearly double-digit MoM improvement in May’s gross adex, we doubt this positive adex sentiment could sustain into the next few months in view of the cautious spending mode adopted by the Malaysian public in general. Based on the past three calendar years' historical performance, the gross adex tend to record a mild MoM growth (1.7%-6.2%) during the fasting month (due to pre-festival spending) but suffered MoM dip (-3.6% to -8.7%) thereafter (as a result of the shortened working period). Nevertheless, we believe the current calendar year may, against the odd, likely record a dip in June’s adex (on MoM basis) due to the continued cautious spending mode adopted amid the rising living cost.

High dividend yield remain the only sweetener. 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 5.9%- 6.0% for FY15 and 6.5%-6.6% for FY16 (please see overleaf for more details), which is on-par/slightly higher than the industry’s 3-year historical average of 6.1% but clearly outpacing the benchmark index’s 3.3%.

Newsprint price is expected to remain firm. Newsprint price, the biggest cost component for print media, has been hovering at the USD480-USD505 range (45gsm newsprint) in 1H15. Going forward, all the print players are expecting newsprint prices to hover at the current level as a result of exchange rates and global market imbalances. Thus, all the local print incumbents are not in a hurry to stock up due to the relative stable prices and ample newsprint inventory of 6-9 months. RISI (the leading provider of information for the global pulp and paper industry), meanwhile, is expecting a flat pricing for 3Q15 and a small increase thereafter, assuming producers address the excess supply problems in the coming months.

Prudent 2015 adex outlook remains. Moving forward, our gloomy view on the sector’s outlook remains where we believe the GST and the current higher cost of living may lower the consumer purchasing power as well as advertisers’ adspend appetite. We expect the market to take 3-6 months to digest the weak consumer sentiment, bringing the total gross adex annual growth rate to 5.1% (or 0.2% ex-Pay TV segment contribution) in CY15.

Source: Kenanga Research - 3 Jul 2015