We maintained our NEUTRAL stance on the sector. The country’s gross adex growth rate advanced by 21% MoM in March, thanks to the longer working days as well as lower base effect. Despite the strong performance in March, YTD adex growth remains lacklustre, suggesting a challenging quarter ahead. We leave our media companies’ FY16-FY17 earnings forecasts as well as target prices unchanged for now, pending their upcoming results release. Although we do not have any conviction buy 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 in 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).

1Q16 gross adex retreated by 10% despite a strong 20.7% MoM expansion in March. The country’s gross adex has shown a robust improvement in March and grew 20.7% MoM to RM611m, marking the first double-digit month-on-month increase since May last year; although it is still trapped in a negative zone if we were to compare the year-on-year change. The robust month-on-month improvement, however, was not a surprise due to longer working days in March as opposed to the holiday-shortened February as well as the lower base effect. The better gross adex in March was mainly led by higher contribution from all media types, except Cinema (-23.3% MoM) and Instore (-0.3% MoM) segments. On YTD March basis, the total gross adex retreated by 10% YoY to RM1.7b, no thanks to the weak performance of all key segments, namely Newspapers (-12.3%); FTV (-4.6%); and Radio (-37.3%). In-Store and Cinema segments, however, bucked the trend and recorded 12.2% and 51.7% growth, respectively, while Magazines segment continued to be affected by the weak consumer sentiment and dipped by 17.7% YoY in 1Q16.

Another challenging quarter for the media incumbents. The lacklustre gross adex performance in 1QCY16 (-10.0% YoY) suggested that the local media players may likely be facing yet another challenging results season ahead. Based on our statistic, STAR’s gross print ads in 1QCY16 declined to RM229m (-9.1% YoY, -10.1% QoQ) while MEDIAC saw its gross print ads dipping to RM183m (-14.4% YoY, -6.2% QoQ). Meanwhile, MEDIA’s gross print adex plunged by 18.4% YoY (or - 19.7% QoQ) to RM244m in 1QCY16, no thanks to the deteriorating adex performance in both Harian Metro and NST. On the FTA-TV segment front, MEDIA’s gross adex slipped 4.6% YoY (-12.4% QoQ) to RM657m in 1QCY16 as a result of the lower adspend recorded in TV3 (-1.9% YoY or -18.9% QoQ to RM248m), 8TV (-10.5% YoY or -2.2% QoQ to RM122m) and TV9 (- 2.2% YoY or -20.2% QoQ to RM119m).

English newspaper advertisers continued to follow the segment leader. STAR’s gross adex was lower by 9.1% YoY in contrast to the English segment drop of 12.9% YoY in 1QCY16, suggesting that advertisers still have the tendency to focus on advertising in the segment leader in the English segment. The trend, however, differed in both the Malay and Chinese segment where the aggregate MEDIA’s Malay newspapers (Harian Metro and Berita Harian) gross adex deteriorated by 16.5% YoY vs. the BM segment of 10.6% YoY in 1QCY16. Similarly, MEDIAC’s gross adex also softened by 14.4% YoY as compared to the Chinese segment of 13.7% YoY. While advertisers appeared less attaching to the BM/Chinese segment’s leader (in view of the deterioration rate was worse than the segment’s average) in the 1QCY16, the finding could somehow be misrepresentative, in our view, due to their respective sizeable gross adex market share (MEDIA: 76%; MEDIAC:86% vs. STAR: 67%), which could lead the smaller players to outperform the segment’s average effortlessly as a result of lower base effect.

Our cautious 2016 adex outlook remains unchanged. We expect the adex sentiment to 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, while we maintained our gross adex target growth of 5.5% YoY in CY16 (as a result of the lower base effect) for now, we may tune-down our expectation should the April’s gross adex resume its strong deterioration trend.

Source: Kenanga Research - 19 Apr 2016