Our NEUTRAL stance on the media sector remains unchanged. Although sectorial valuation (excluding ASTRO) may appear enticing at forward PER of only 9.6x (which is not far from its 6- year’s trough PER of 8.2x), we remain concerned over the lack of key earnings catalysts amid a challenging operational environment as a result of the weak MYR and consumer spending. Decent dividend yield appears to be the only saving grace for the sector. The uninspiring YTD August gross adex performance as well as the higher currency volatility coupled with sustained low newsprint prices has compelled us to revisit our financial models’ key assumptions. Post review, we have lowered our STAR’s FY15/16E PATAMI by 3.5/4.3% and 4.7/5.8% for Media Prima (MEDIA). Media Chinese (MEDIAC), meanwhile, had its FY16/17E PATAMI trimmed by 10.4/6.8%, while Astro’s earnings forecast is unchanged. In tandem with the latest earnings review, we have also reduced our media companies’ target prices. ASTRO (TP: RM3.30) remains the only OUTPERFORM rated stock in the sector due to its resilient earnings and decent dividend yield. We reiterated our MARKET PERFORM call on MEDIA (TP: RM1.16 from RM1.22 previously), MEDIAC (TP: RM0.53 from RM0.58 previously) and STAR (TP: RM2.52 from RM2.60 previously).

1H15 earnings were in-line but at the lower end of their historical range. The sector incumbents’ 1HCY15 results were generally within expectations, albeit the results were at the lower end of their respective historical 1H performance. Weak adex revenue (as a result of cautious spending by both consumers and businesses due to the implementation of GST), and unfavorable forex were the main common issues that were faced by the incumbents during the quarter.

August’s gross adex softened by another 0.9% MoM (vs. -7.0% MoM in July), bringing its YTD growth to -1.3% YoY. The uninspiring August’s gross adex was mainly dragged by lower adspend in the PayTV segment (-4.3% MoM) while the newspaper and FTV segments unexpectedly grew and improved by 2.8% MoM each, despite the growing concerns over the country’s economy outlook as a result of the weakening Ringgit. On YTD August basis, the total gross adex growth contracted to -1.3% YoY (vs. YTD July of -1.0% YoY) to RM9.0b, no thanks to the weak performance of FTA (-11.5%) and Newspaper (-10.2%) segments. PayTV segment, meanwhile, has undergone three consecutive months of shrinkage and narrowed its YTD growth to 11.8% YoY.

Stripping off the PayTV segment contribution, the YTD August gross adex weakened by 9.1% YoY to RM5.2b. Floor and ceiling valuations. We believe the sector’s incumbents could potentially fall into the -2 standard deviation level of their respective valuation ranges should: (i) adex revenue continue to decline as a result of the poor consumer spending, (ii) MYR continue to depreciate against the USD, and (iii) dividend yields become less compelling. On the flip side, we believe the near-term ceiling valuations could be capped at their respective mean levels in view of the lack of key earnings catalysts (please refer to overleaf for more details).

High dividend yield remains 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 6.4% for FY15 and 6.8% for FY16, which is close to the industry’s 3-year historical average of 7.1% but clearly outpacing the benchmark index’s 3.3%.

Revised our Adex growth rate, Ringgit and Newsprint price assumptions. In view of the lackluster YTD August gross adex performance, we have lowered our CY15/CY16 adex growth estimate to 0.0%/3.7% (from 4.1%/5.5% previously). Meanwhile, we also revised our CY15/CY16 USD/MYR currency exchange forecast lower to align with our latest in-house economic team’s estimates. On top of that, we also reduced our newsprint price assumption for all the print players given the persistently weak but stable newsprint price trend. Note that all the newsprint incumbents have c.6-9 months of newsprint inventories with an average cost of USD530-570/tonne. The following tables outlined our key assumptions and earnings changes pre and post the revisions.

Source: Kenanga Research - 7 Oct 2015