We reiterate our NEUTRAL stand on the sector. July’s gross adex has deteriorated by another 7.0% MoM, lowering its YTD growth to -1.0% YoY (vs. YTD June of 0.5% YoY). The weakening of July’s gross adex is within our expectation following the feeble market sentiment led by the prolonged 1MDB related issues as well as the weakening of the Ringgit. All the key media types recorded a negative MoM dip in July with an exception of the targeted audience-centric media (i.e. Magazines & Cinema segments). Thus, this set of numbers suggests that advertisers tend to shift their interest to the latter during time of uncertainties. We are keeping our earnings forecasts and target prices for all the media companies. We reiterated 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: RM1.22), Media Chinese (MEDIAC, TP: RM0.58) and Star Media (STAR. TP: RM2.60).

Cautious mode remains. July’s gross adex dipped another 7.0% MoM (vs. -5.4% MoM in June). The softer performance in July’s gross adex on a MoM basis was not a surprise as advertisers continued to adopt a cautious mode followed the growing concerns over the country’s economy outlook as a result of the weakening Ringgit. Note that the MYR has depreciated against the dollar by 1.5% in July or 9.5% YTDJuly, which could lead to some advertisers revisiting their A&P budgets.

The vulnerable gross adex in July was mainly led by lower contribution from all media types, except the Magazines, and Cinema segments. On YTD-July basis, the total gross adex growth contracted to -1.0% YoY (vs. YTD June of 0.5% YoY) to RM7.9b, no thanks to the continuous weak performance on FTA (-11.0%) and Newspaper (-10.7%) segments. PayTV segment gross adex, meanwhile, has undergone two consecutive months of shrinkage and narrowed its YTD growth to 12.8% YoY.

Stripping off the Pay-TV segment contribution, the YTD July gross adex weakened by 9.2% YoY to RM4.6b. Limelight remains on the targeted audience-centric media. Despite the weak adex sentiment in July, advertisers continued to favour the targeted audience-centric media types (i.e. Magazines, In-Store, and Cinema) at the expense of the traditional mass market focused media. The former segments’ contributors, namely the PayTV, Newspaper, and FTA segments weakened by 1.1% MoM, 11.1% MoM and 11.0% MoM, respectively, in July in contrast to the mid-single digit growth in the non-traditional segments (i.e. Magazines and Cinema). This set of numbers suggests that advertisers tend to shift their interest to the targeted audience-centric media types during time of uncertainties.

Newspaper YTD July’s gross adex dipped by 10.7% YoY to RM2.4b as a result of the sluggish performance in all language's segments (BM (-14.6%), Chinese (-7.5%) and English (-12.4%)) on the back of weaker consumer sentiment. Indeed, the segment‘s gross adex has continued contracted for seven consecutive months (on a year-on-year basis) since January this year. Apart from the weakening consumer sentiment, we also opine that the increasing popularity of digital advertising (thus leading some advertisers to reposition their adex allocation in each segment) could be another reason for cause for the shrinking newspaper adex pie. All the newspaper players under our coverage suffered a MoM decline in July with MEDIAC taking the lead (-18.8%0, followed by STAR (-10.4%) and NSTP (-10.4%).

The YTD Pay TV gross adex continued to grow but at slower space. The YTD July’s Pay TV segment gross adex continued to show a double-digit growth of 12.8% YoY to RM3.4b at the expense of FTA TV, which dipped by 11.0% YoY. The growth, however, was at a slower pace, reduced from the high to low double-digit growth as a result of the softer consumer sentiment. MEDIA’s July gross adex, meanwhile, dipped by 14.6% (the worse MoM drop since February) or 20.3% YoY, no thanks to the sluggish performance of all its channels. Nevertheless, in view of MEDIA’s TV discount factor has already narrowed to 70.8% in 2Q15 (vs. 72.1% in 1Q15), the net impact to the group’s adex revenue may not be too severe.

Gloomy adex outlook remains. We believe the adex spending sentiment will still be overshadowed by: (i) the current rising cost of living, (ii) higher cost of doing business as a result of the weakening in Ringgit, and (iii) the weak consumer sentiment caused by the GST implementation, which the market is still digesting. We do not discount that the current weak consumer sentiment could lead advertisers to re-visit their annual A&Ps budget. 

Source: Kenanga Research - 20 Aug 2015