Our NEUTRAL stand on the sector remains unchanged. The country’s gross adex growth rate declined by 3.0% in CY15 as a result of the continued guarded spending mode. Moving forward, while we believe advertisers are likely to continue staying cautious in 1H16 amid the uncertain economic scenario and weaker Ringgit, the adex sentiment is expected to improve gradually in the 2H16, thanks to the several adex-friendly events. Meanwhile, on the corporate earnings front, all the media players reported lacklustre gross adex revenue growth in 4QCY15, suggesting lower quarterly earnings ahead. We leave our media companies’ FY15-FY16 earnings forecasts as well as target prices unchanged for now, pending their upcoming 4QCY15 results release. 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).

CY15 gross adex softened to RM13.6b (-3.0% YoY vs. our flat YoY forecast and 4.7% YoY growth in CY14). The uninspiring gross adex annual growth rate was mainly due to the continued poor adex sentiments, not surprising given the escalating cost of living after a series of a hike in toll rates, petrol prices and public transportation fares. On top of that, the persistently weak MYR (against USD) also led to some advertisers scaling back their A&P budgets, thus dampening the adspend appetite.

Further diversifying the media portfolio. While the traditional media segments continued to dominate the lion's share in the advertising pie, advertisers have constantly increased their willingness to further diversify into the non-traditional media in CY15 (i.e. Cinema (43% YoY to RM63m) and In-store (17% YoY to RM183m)) rather than continuing their focus on the mass-market publications. These diversifications caused the mainstream media segments, namely FTA TV and Newspaper segments’ gross adex waning by 10.9% and 10.7%, respectively. Pay TV segment annual growth rate, meanwhile, also softened to 6.5% YoY in CY15 as compared to a double-digit YoY growth over the past few years. On a MoM basis, the total gross adex grew by 8.5% in December (vs. 3.0% in November), as a result of moderate growth in the key segments.

Another challenging quarter for the media incumbents. The lacklustre gross adex performance in 4Q (-9.9% YoY) suggested that the local media players may likely face yet another challenging result season ahead. Based on our statistic, STAR’s gross print ads in 4QCY15 has declined to RM255m (-10.7% YoY, +2.1% QoQ) while MEDIAC saw its gross print ads dipping to RM195m (-6.9% YoY, +7.3% QoQ). Meanwhile, MEDIA’s gross print adex plunged by 11.1% YoY (or -14.4 QoQ) to RM304m in 4QCY15, no thanks to the deteriorating adex performance in its entire print segment. On the FTA TV segment front, MEDIA’s gross adex slipped 6.3% YoY (+9.7% QoQ) to RM673m in 4QCY15 as a result of the lower adspend recorded in most of its TV channels, namely 8TV (-2.3% YoY or 12.2% QoQ to RM125m), NTV7 (-15.4% YoY or 23.2% QoQ to RM94m) and TV3 (-9.2% YoY or 10.2% QoQ to RM306m). Despite the weak FTA TV adex sentiment, the group’s TV9 channel managed to buck the trend and recorded 4.3% YoY growth (or 0.2% QoQ to RM149m). Astro’s gross adex, meanwhile, recorded a mild growth in 4QCY15 to RM1.48b (-1.7% YoY or 8.5% QoQ).

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 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.

Source: Kenanga Reasearch - 19 Jan 2016