Our NEUTRAL stance on the sector remains unchanged. The country’s gross adex growth rate has resumed its decline and dipped 7.5% MoM in April, no thanks to the continued cautious mode adopted by the advertisers coupled with the higher base effect, bringing YTD performance to -9.4% YoY. We leave our media companies’ FY16-FY17 earnings forecasts as well as target prices unchanged for now, pending their upcoming results releases. Although we do not have any conviction buy for now, we still favour ASTRO (MP, TP: RM2.93) in view of its relatively resilient earnings and decent dividend yield. We reiterate our MARKET PERFORM call on MEDIA (TP: RM1.45), MEDIAC (TP: RM0.65) and STAR (TP: RM2.41).

April’s gross adex dipped 7.5% MoM (vs. +20.7% MoM in March), bringing its YTD loss to 9.4% YoY. The country’s gross adex failed to sustain its growth engine in April and deteriorated by a mid-high single digit on a month-on-month basis. We believe the weaker adex performance in April was mainly due to the continued guarded mode adopted by the advertisers coupled with the higher base effect. The vulnerable April gross adex performance was mainly led by lower contribution from all media types, except the Radio (+8.2% MoM) and the In-Store (+0.1% MoM) segments. YTD April, the total gross adex growth narrowed marginally to -9.4% YoY (vs. YTD March of -10.0% YoY) to RM2.3b, no thanks to the continuous weak newspaper (- 11.0%) and FTV (-4.4%) segments' performance, albeit partially offset by the higher contribution from both the Cinema (+47.1%) and In-Store (+12.9%) media types.

Delving deeper, STAR’s April gross adex had declined to RM77m (-12.9% MoM) after experiencing a sharp 33.8% MoM a month ago, but continued to suffer a dip of 12.2% as compared to the same period last year. Meanwhile, MEDIAC’s gross adex faded by 7.2% MoM (or -1.8% YoY) as a result of the softer ad spend in China Press (-8.9% MoM to RM18m) while its flagship newspaper – Sin Chew daily’s adex weakened by 4.9% MoM. MEDIA’s gross print ads, on the other hand, lowered marginally by 0.2% MoM (or -14.7% YoY) to RM96m in April, thanks to the stable performance in all its newspapers. On the FTV front, MEDIA’s gross adex resumed its decline in April and softened by 9.3% MoM to RM193m. This, to a certain extent, could be due to the prolongs guarded mode adopted by advertisers, compelling the publicists shifting some of their A&P budget to other alternative media types.

Finding a new norm. While the overall adex sentiment remains vulnerable amid the rising cost of doing business, the volatility of the recent absolute gross monthly adspend change seemed less volatile within the +/-RM50m range (figures 8). This suggested that advertisers were still adopting a prudent approach but continued to spend their A&P budget to align with its marketing plan. Should these trends persist, we would expect the gross annual adex growth to record a low single digit but able to provide a relatively stable gross advertisement revenue to the incumbents.

Anticipating a challenging 1Q16 result. 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). MEDIA has released its 1Q16 performance on last Thursday, where the group’s core PATAMI was lower by 9% YoY amid 8% decline in top-line. We expect STAR and MEDIAC to report a similar trend in their coming 1QCY16 result.

Cautious mode remains. We expect the adex sentiment to remain cautious in 1H16 in light of the current global economic situation, the position of MYR as well as rising cost of doing business, 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 made no changes to our gross adex target growth of 4.0% YoY in CY16 (as a result of the lower base effect) for now, but may tune-down our expectation should the gross adex continue its deterioration trend. 

Source: Kenanga Research - 19 May 2016