We reiterate our NEUTRAL view on the sector. September’s gross adex has rebounded by 3.4% MoM, followed three consecutive months of deteriorating, bringing its YTD growth to -2.4% YoY. Apart from the lower base effect, we believe the slight improvement in September’s adex could also be driven by some backlog advertising orders. All the key media companies have recorded lacklustre 3QCY15 gross adex, suggesting a challenging report card ahead. Moving forward, while we believe advertisers are likely to continue staying cautious amid uncertain economic scenario and weaker Ringgit, we do not discount that the country’s adspend may improve in the seasonally strong 4Q. There are no changes in our earnings forecasts and target prices for all the media companies. We reiterated our OUTPERFORM call on ASTRO (TP: RM3.30) due to its resilient earnings and decent dividend yield and MARKET PERFORM ratings on Media Prima (MEDIA, TP: RM1.16), Media Chinese (MEDIAC, TP: RM0.53) and Star Media (STAR. TP: RM2.52).

A mild rebound. September’s gross adex rebounded by 3.4% MoM (vs. -0.9% MoM in August) after recording three consecutive months of decline. The adex ricochet, which was mainly led by the higher FTA TV & magazine segments' contributions, was a pleasant surprise to us given that the MYR has hit multi-year lows against the USD in September. We do not discount that the mild adex improvement in September, to a certain extent, could be driven by some backlog orders from advertisers as the latter would have booked ads in advance. Moving forward, while we believe advertisers will continue to adopt a cautious mode in the remaining months, there is a likelihood for the country’s adspend to improve in 4Q when advertisers tend to rush to finish their annual budget. In view of the lacklustre YTD September gross adex performance, we maintained our flattish gross adex growth rate view for CY15.

The mild improvement in September’s gross adex was mainly driven by better contribution from FTA TV (9.7% MoM) and Magazine (40.6% MoM) segments. The former was mainly driven by higher adex recorded in both the TV3 (20.7%) and 8TV (37.5%) channels as a result of the school holidays. The latter, meanwhile, was believed to benefit from the low-base effect in August, which dipped by 20.4% MoM. On a YTD September basis, the country’s gross adex has contracted by 2.4% YoY (vs. -1.3% YoY in YTD August) as a result of the double digit waning in both the newspaper (-11.3%) and FTA TV (-11.6%) segments.

Stripping off the Pay TV segment contribution, the YTD September gross adex weakened by 9.6% YoY to RM5.9b. 3QCY15 gross adex revenue appears challenging. All the media companies reported weak performance in 3QCY15, where the overall gross adex has weakened by 6.5% QoQ (or 8.0% YoY). Based on our statistic, MEDIA’s gross print ads in 3QCY15 declined by 9.9% QoQ (or -19.0% YoY to RM356m) while MEDIAC saw its gross ads dipping by 5.8% QoQ to RM182m (or -11.8% YoY) similar to STAR (-5.7% QoQ; -12.3% YoY to RM249m). On a net adex revenue basis, assuming a comparable discount rate, the print players’ net adex revenue may be set to be lower as compared to the prior financial year or preceding quarter. On the TV segment front, MEDIA’s gross adex was lower by 3.5% QoQ (or -12.1% YoY), no thanks to the weak performance of all TV channels, especially NTV7 (-11.8% QoQ) and 8TV (-9.7% QoQ). Despite recording a lower gross adspend in 3QCY15; its net adex revenue could potentially be cushioned by a lower discount rate, if the group manage to reduce the discount rate further (2Q15: 69.5%; 1Q15: 72.1%; 3Q14: 70.5%). ASTRO’s gross adex, meanwhile, softened by 8.6% QoQ (or +1.3% YoY) but its net earnings impact is expected to be minimal due to its hefty discount rate of more than 90%, based on our back-of-the-envelope calculation.

Cautious mode remains. We believe the adex spending sentiment will remain cautious for the remainder of 2015 in light of the current global economic situation and the state of Malaysia’s currency. On top of that, the recent hikes in both toll rates and petrol prices are likely to push the cost of doing business higher, thus could compel some advertisers to re-visit their annual A&Ps budget moving forward.

Source: Kenanga Research - 20 Oct 2015