We reiterate our NEUTRAL stance on the media sector. While the sector’s valuation (excluding ASTRO) may appear enticing at forward PER of only 10.1x (which is not far from its 6-year trough PER of 8.2x), it still does not warrant a conviction upgrade yet in view of 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. We make no changes to all our media companies’ earnings estimate for now. ASTRO (TP: UNDER REVIEW, previous TP was RM3.30) remains the only OUTPERFORM rated stock in the sector due to its relatively resilient earnings and decent dividend yield. We reiterated our MARKET PERFORM call on MEDIA (TP: RM1.48), MEDIAC (TP: RM0.61) and STAR (TP: RM2.36).

9M15 earnings achieved at the lower end of their historical range. The sector incumbents’ 9MCY15 results were generally within expectations, albeit at the lowerend of their historical range. Persistently weak adex revenue (as a result of cautious spending by both consumers and businesses due to the challenging economic outlook and rising cost of living) and unfavorable forex were the main common issues faced by them during the quarter.

November’s gross adex improved by 2.8% MoM (vs. -5.1% MoM in October), bringing its YTD growth to -3.2% YoY. The mild improvement in November’s gross adex was mainly driven by higher newspaper (+1.1% MoM) and PayTV (+5.9% MoM) segments after the sluggish performance a month ago. The former was mainly driven by higher Chinese and English newspapers ads while the latter by higher adspend in AXN and Astro Hua Hee Dai channels. On YTD November basis, the total gross adex growth contracted to -3.2% YoY to RM12.4b, no thanks to the weak performance of FTA (-11.3%) and Newspaper (-10.7%) segments.

Stripping off the PayTV segment contribution, the YTD November gross adex weakened by 9.2% YoY to RM7.2b. Adex sentiment is expected to improve gradually in 2HCY16. We believe the adex sentiment will remain cautious in 1H16 in light of the current global economic situation and the position of MYR. On top of that, the rising cost of living as a result of rice subsidy removal, electricity tariff adjustment as well as a series of toll hikes are likely to push the cost of doing business higher, which could compel some advertisers to continue adopting a cautious mode. Having said that, we expect the adex sentiment to improve gradually moving towards 2H16, thanks to the several adex friendly events, i.e. Summer Olympics and UEFA Euro cup, which are scheduled to take place from mid-2016 onwards. All in all, we expect the country’s adspend (ex-pay TV segment) to improve by 5.5% YoY in CY16 as a result of the low base effect.

Newsprint price is expected to remain firm. Newsprint price, the biggest cost component for print media, has been hovering at the USD480-USD500/MT range (45gsm newsprint) in CY15. Going forward, all the print players are expecting newsprint prices to hover at the current level as a result of exchange rates and weak demand. Thus, providing lesser reasons for the local print incumbents to stock up aggressively in view of the relative stable prices and ample newsprint inventory of 6-9 months. RISI (the leading provider of information for the global pulp and paper industry), meanwhile, is expecting the newsprint price to increase mildly in 2016 as a result of capacity closures, but still below the USD500/MT level.

Cost control measurements continue. While the newsprint price is expected to remain firm in CY16, we understand that the print incumbents intend to continue their stringent cost control measurements on newsprint consumption in light of the challenging adex outlook. On top of that, we gather that the industry players are also intending to streamline their labour costs further through recruitment freeze and contract staffs’ contracts review.

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 6.3% for FY15 and 6.5% for FY16, which is close to the industry’s 3-year historical average of 6.7% but clearly outpacing the benchmark index’s 3.1%. 

Source: Kenanga Research - 7 Jan 2016