We are keeping our NEUTRAL stance on the media sector. The print incumbents are expected to benefit from the current trend of low newsprint prices but the positive momentum may be capped by the weak Ringgit. On the TV segment front, the FTA-TV players are expected to face a greater challenge under the new DTT service in view of the hefty cost structure of transmissions rental. The negative sentiment, we believe, has dampened the recent share price performance of Media Prima (MEDIA) despite the group and other potential TV players are still negotiating the rates with MYTV. Adex-wise, in view of the lacklustre performance in the 1H15, we have lowered our CY15-CY16 gross adex growth estimate by 1% each to 4.1% and 5.5%. Meanwhile, we also revise our newsprint price and currency assumptions, after taking the latest price trend movement into consideration. All in, we are keeping our ASTRO’s earnings forecasts unchanged but lowered our MEDIA and Star Media (STAR)’s FY15/FY16 net profit by -1.7%/-2.0% and -1.0%/-2.1%, respectively. For Media Chinese (MEDIAC), its FY16E/FY17E net profits have been revised by -0.9%/+2.0% after changing the above-mentioned assumptions. ASTRO (OP, TP: RM3.38) remains our top pick for the sector due to its resilient earnings and decent dividend yield. Post earnings review, we have marginally raised our target price for MEDIAC (TP: RM0.58 from RM0.57 previously) and STAR (TP: RM2.63 from RM2.49 previously after rolling the latter’s valuation base year to FY16) while keeping the MARKET PERFORM ratings unchanged. Meanwhile, MEDIA’s target price is lowered to RM1.22 (from RM1.74 previously) after rolling over the valuation base year to FY16 but with lower targeted PER of 8.9x (-1 Std Dev below the 6-year mean) from 13.1x previously (6-year average) to reflect the potential earnings' risk post the official rollout of DTT service. Our MARKET PERFORM rating on MEDIA remains unchanged.

Current newsprint price is expected to stay. All the local print incumbents are expecting the newsprint prices to hover at the current level (at c. USD500/MT) over the next few months, in alignment with RISI’s expectation. As a result, we see no urgency for players to re-load their newsprint inventories in an aggressive manner. Having said that, all the local incumbents’ average newsprint prices are set to be reduced progressively given that the current rate is below their average costs. This positive factor, however, is expected to be partially offset by the weak Ringgit.

Potential hefty transmission costs in DTT. The digital terrestrial TV (DTT), which set to provide an alternative digital TV platform to enhance TV viewing, has rolled out its test transmission in West Malaysia and will soon be extended to East Malaysia in August 2015 followed by the Northern and Southern parts of the Peninsular Malaysia before reaching the Klang Valley by the year and achieve 85% nationwide coverage. On the transmission fee front, we understand that MYTV intends to charge RM25m for one High Definition (HD) channel and RM12m for a Standard Definition (SD) channel. Should this cost structure is implemented, MEDIA is expected to face a great challenge in its operational costs given the group’s annual transmission rental & expenses are expected to surge from the current RM42m-RM43m range to more than RM100m, based on our preliminary analysis. Nevertheless, in view of the current hefty cost structure, we understand that MEDIA and other potential TV players are currently renegotiating the rates with MYTV. In view of the uncertainty of the overall cost structure, we have yet to impute any DTT service assumptions into our financial model (for MEDIA).

Deconstructing ROE: DuPont analysis. After taking the extended five-step DuPont model and breaking return on equity down into five components, we believe all the media companies would need to address their EBIT margin and asset turnover ratio (except MEDIAC) in order to improve ROE moving forward. Besides, we also observed that MEDIAC would also need to address its high interest burden issue to improve EBT and subsequently ROE. All the incumbents have outlined their forward strategies over the past few months and appeared to be heading towards the right direction to address the abovementioned issues. There is no surprise that ASTRO enjoys the highest valuations as compared to its media peers due to its highest ROE on the back of higher operational efficiency and the ability of generate profits. On the print segment front, we favour STAR over MEDIAC, despite the former having a lower ROE for now, due to its strong net cash of RM362m which could allow the group to seek for other business opportunities.

Revised earnings assumptions. In view of the lacklustre adex performance in the 1H15, we have lowered our FY15/FY16 full-year gross adex forecasts by 1% each to 4.1%/5.5%, respectively. On top of that, we also take this opportunity to revise all our print players’ newsprint costs and currency assumptions after taking the latest price movement into consideration. Meanwhile, should there is any drastic movement in the newsprint price and currency moving forward, we believe MEDIAC will have the highest impact on its earnings due to its relatively higher newsprint consumption and overseas market contribution.

Newsprint price remained firm in 1H15 but….. The global newsprint market remains in an oversupply situation with demand dropping around the world in 1H15. Nevertheless, newsprint price, the biggest cost component for print media, has been hovering at USD480-505/MT (Hong Kong’s 45gsm newsprint) over the said period.

….expect a marginal fluctuation in the 2H15. Moving into the 2H15, RISI, the leading provider of information for the global pulp and paper industry, is expecting the newsprint prices to stay firm at the current level in 3Q15 despite the global excess situation given the current low margins (of the newsprint manufactures) which is expected to prevent further erosion. Having said that, the research outfit expects a small price increase in the 4Q15, assuming announcements of supply reductions in the coming months. Moving into 2016, RISI is predicting a small increase in price in the 2Q16, but expect prices to begin to retreat again at the end of the year.

No urgency in loading newsprint inventories aggressively. Moving forward, all the print players are expecting newsprint prices to hover at the current level (at c.USD500/MT) over the next few months, in-line with RISI’s expectation; thus, providing less motvation to stock-up newsprint inventory in an aggressive manner. MEDIAC’s current newsprint inventory is sitting at about 6-month (lowered from 9-month by end-CY14) with an average newsprint price at c.USD550/MT. MEDIA, meanwhile, has the lowest newsprint inventory among the big players at merely 3-4 months (but was within its average routine), with an average price of RM2.0k to RM2.2k/MT). STAR, on the other hand, continues to have the highest newsprint inventory of 9-month with an estimated average price of USD550-600/MT.

Ringgit: unpredictable and volatile. Our in-house economic team is of the view that both domestic and external factors will continue to weight down the Ringgit over the short-term. Until the US Federal Reserve makes the first-rate hike for the current cycle, which is now expected to be pushed back to September, USD/MYR is expected to stay largely in the RM3.65 to RM3.85 range. Our economist has revised his average USD/MYR forecast for 2015 to RM3.68 from RM3.57 previously and projected RM3.60 for 2016.

Source: Kenanga Research - 29 Jul 2015