Our NEUTRAL stance on the media sector remains unchanged. Although the sector valuation appears enticing at forward PER of only 11.6x, it still does not warrant a conviction upgrade yet due to the lack of key earnings catalysts. The sector incumbents’ core businesses operating environment continues to remain challenging in view of the feeble adspend revenue coupled with weak consumer spending; there is an increasing trend where players are venturing into the non-traditional media portfolio to reduce dependence on the traditional medium. Decent dividend yield appears to be the only saving grace for the sector. Although we do not have any conviction buy rating for now, we still favour ASTRO (MP, TP: RM2.93) among others in view of its relatively resilient earnings and decent dividend yield. We will turn into buyers again should Astro’s share price is able to provide >10% in total returns. We reiterated our MARKET PERFORM call on MEDIA (TP: RM1.39), MEDIAC (TP: RM0.65) and STAR (TP: RM2.41).

Mixed CY15 report cards. The sector incumbents’ CY15 results were mixed with STAR being the sole outperformer (mainly attributed to its better-than-expected event segment’s revenue) while MEDIA failed to meet expectations as a result of its poor top-line performance. MEDIAC’s 9M16 results, meanwhile, came in within expectations, albeit at the lower-end of its 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 as well as volatile forex were the main common issues faced by the players during the quarter.

Another lacklustre adspend in February. Nielsen media recently reported that the country’s gross adex has softened by 13.5% MoM to RM506m (vs. January’s 14% MoM) in February, lowering the YTD growth to -9.6% YoY (to RM1.1b) and marked the 12th consecutive months of deterioration if we were to compare the year-on-year change. The decline is suggesting that consumer sentiment in the first two months of 2016 remains dawdling. Apart from that, we also believe that the adex decline in February was also caused by: (i) shorter working days as a result of Chinese New Year holidays, and (ii) advertisers’ tendencies to conserve A&P budget in the first two months of the new year to renegotiate new advert rates. Cinema and In-Store segments adspend were the only two divisions that recorded positive growth in February while the top two adspend contributors – Newspapers and FTV segments, continued to suffer 12% and 10% dip on a month-on-month basis.

Further diversified. The persistent challenging adex outlook (as a result of cautious spending by both consumers and businesses due to the challenging economic outlook and rising cost of living) have prompted the industry incumbents to venture into the non-traditional media portfolio. Both ASTRO and MEDIA have entered into the home shopping segment while making good progress in their content creation business. STAR, meanwhile, has expanded its event division aggressively following the recent completed acquisition of Victory Hill Exhibitions Ptd Ltd. MEDIAC, on the other hand, remains focused on its core media portfolio while expanding its digital platform to facilitate its print media segment. MEDIAC’s travel & travel-related services continued to perform and accounted for c. 26% (9M15: 22%) of the group’s topline in 9M16 and 16% (vs. 9.0% a year ago) at the PBT level.

Expecting clearer transmission fee structure. While the details of the transmission fee structure (under the Digital Terrestrial Television (DTT) project) have yet to be ironed out, industry incumbents are expecting the air to clear in the coming weeks. Apart from the challenging adex outlook, the ambiguity of the hefty transmission fee structure has also dampened MEDIA’s share price performance over the past few months. We understand that MEDIA has reaffirmed its stand of maintaining its current transmission cost structure (at c.RM40m/year vs. MYTV’s proposed structure of RM25m for one High Definition (HD) channel and RM12m for a Standard Definition (SD) channel). Thus, should the uncertainty is removed, it could provide a short-term positive catalyst to MEDIA, in our view.

High dividend yield remains the only sweetener for the sector in view of the gloomy adex outlook. The sector is currently trading at an expected average dividend yield of between 5.9% for FY16 and 6.2% for FY17, which is close to the industry’s 3- year historical average of 6.0% but clearly outpacing the benchmark index’s 3.1%.

Adex sentiment is expected to improve gradually in 2HCY16. While we believe adex sentiment will remain cautious in 1H16 (in light of the current global economic situation, the position of MYR and a rising cost of doing business following a series of subsidy removal), there is a likelihood for 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 to improve by 5.5% YoY in CY16 as a result of the low base effect.

Source: Kenanga Research - 6 Apr 2016