June’s gross adex has deteriorated by 5.4% MoM, lowering its YTD growth to 0.5% YoY (vs. YTD May of 3.1% YoY). The weakening of June’s gross adex is within our expectations following the feeble market sentiment led by the prolonged 1MDB-related issues as well as Greece’s debt crisis. Most of the print and TV segments incumbents’ gross adex revenue have recorded a positive QoQ growth in 2QCY15 but is likely to have minimal impact on their net earnings due to a higher discount rate. Our NEUTRAL stand on the sector and target prices for all the media companies are currently under review (likely to be maintained or a mildly positive upgraded), pending the release of our latest newsprint price and currency forecast. For now, we make no changes to our OUTPERFORM call on ASTRO (TP: RM3.38) due to its resilient earnings and decent dividend yield and MARKET PERFORM ratings on Media Prima (MEDIA, TP: RM1.74), Media Chinese (MEDIAC, TP: RM0.57) and Star Media (STAR. TP: RM2.49).

Back to belt-tightening again. June’s gross adex dipped 5.4% MoM (vs. +9.9% MoM in May). The weaker performance in June’s gross adex on a MoM basis was not a surprise as the market generally re-adopted a cautious mode after the Ringgit continued to depreciate (against the greenback) as a result of the continued foreign funds' outflow, leading some advertisers to revisit their A&P budgets. On top of that, we believe, the prolonged Greece’s debt crisis also led some advertisers to defer their spending, and skewed towards 2H15.

The vulnerable gross adex in June was mainly led by lower contribution from all media types, except the Radio, In-Store, and Cinema segment. On YTD June basis, the total gross adex growth narrowed to 0.5% YoY (vs. YTD May of 3.1% YoY) to RM6.8b, thanks to the continuous strong Pay-TV (+14.2%), albeit partially offset by the lower contribution from both the FTA-TV (-9.3%) and Newspaper (-9.1%) segments.

Stripping off the Pay-TV segment contribution, the YTD June gross adex weakened by 7.8% YoY to RM3.9b. Focus on targeted audience-centric media. Despite the weak adex sentiment in June, advertisers tend to lower their gross ad spends in the mass market focused media rather than the non-traditional media types. The traditional mass markets focused adex contributors, namely the PayTV, Newspaper, and FTA segments weakened by 10.7% MoM, 3.9% MoM and 0.3% MoM, respectively, in June in contrast to the mid-to-double-digit growth in the non-traditional segments (i.e. Radio, Instore and Cinema). This suggested that advertisers tend to shift their interest to the targeted audience-centric media types during time of uncertainties.

Improved quarterly gross adex number but likely to be offset by the higher discount rate. The overall gross adex performance in 2QCY15 appeared somewhat encouraging in contrast to the prior quarter (+6.0% QoQ) but still dipped by 4.6% when compared to the same period last year. Based on our statistic, STAR’s gross print ads in 2QCY15 have improved to RM264m (5.1% QoQ, -13.8% YoY) while MEDIA saw its gross print ads advancing to RM395m (31.8% QoQ, -8.2% YoY) on the back of the higher contribution from both Harian Metro and Berita Harian. Meanwhile, MEDIAC’s gross print adex declined by 9.6% QoQ (or -10.1% YoY) to RM193m in 2QCY15, no thanks to the weaker adex performance from Sin Chew Daily. On a net adex revenue basis, assuming a similar discount rate, the print players’ net adex revenue may likely see a positive QoQ growth in 2QCY15 (as opposed to the 1QCY15). Nevertheless, in view of the challenging adex outlook post the GST implementation and rising cost of living, the print incumbents may need to increase the discount rate to lure advertisers. Thus, suggesting that its net adex revenue may likely come in slightly lower or at flat at best as compared to the prior quarter. On the FTA-TV segment front, MEDIA’s gross adex improved 4.5% QoQ (-10.9% YoY) to RM636m in 2QCY15 as a result of the higher adspend recorded in both TV3 and TV9. On top of that, we also believe the improved quarterly number was also helped by the higher discount factor where the group has raised the rate to 72.1% in 1QCY15, the highest level since 2011. Astro’s gross adex, on the other hand, continued to climb and recorded 4.3% QoQ (4.4% YoY) in 2QCY15. Having said that, its net earnings impact is expected to be minimal due to its hefty discount rate of more than 90%, based on our back-of-theenvelope calculation. 

Source: Kenanga Research - 21 Jul 2015