Our NEUTRAL stance on the sector remains unchanged. The country’s gross adex growth rate has continued its upward trend and record 12.3% MoM in June, thanks to the adex-friendly UEFA Euro cup event coupled with positive sentiment arising from fasting month, narrowing YTD performance to -8.9% YoY. Media Prima (MEDIA), meanwhile, is likely to report a sequential better set of 2Q16 numbers, according to Nielsen’s gross adex data. We leave our media companies’ FY16-FY17 earnings forecasts as well as target prices unchanged for now, pending their upcoming results releases. We still favour ASTRO (OP, TP: RM3.02) among others in view of its relatively resilient earnings and decent dividend yield. We reiterate our MARKET PERFORM call on MEDIA (TP: RM1.45), and STAR (TP: RM2.37) while keeping UNDERPERFORM rating on MEDIAC (TP: RM0.63).

June’s gross adex boosted by the FTA segment and surged 12.3% MoM (vs. 5.5% MoM in May), narrowing its 1H16 decline to -8.9% YoY. The country’s gross adex continued to sustain its growth momentum for the second month in June and a low double-digit growth on a month-on-month basis. The fairly strong adex performance in June is believed to benefit from the UEFA Euro cup fever, which led the FTA and Newspaper segments surging by 20.5% MoM and 7.4% MoM, respectively. The Cinema segment gross adex, meanwhile, also enjoyed a remarkable growth of 34.4% MoM in June, mainly driven by the traditional summer movie season as well as the local school holidays. For 1H16, the total gross adex growth narrowed to -8.9% YoY (vs. YTD May of -10.4% YoY) to RM3.6b, no thanks to the continuous weak newspaper (-11.9%) and Radio (- 48.8%) segments’ performance, albeit partially offset by the higher contribution from both the FTA (+0.6%) and Cinema (+37.7%) media types.

Media Prima (MEDIA) – likely to report a sequential better set of 2Q16 numbers. MEDIA’s FTA and Newspaper segments’ (which combined contributed c.80% to its topline) gross adex improved by 13.1% QoQ and 30.7% QoQ (or 1.0% YoY and -19.0% YoY), respectively, in 2Q16, according to Nielsen data. We believe the UEFA Euro Cup event was the key driver driving sentiment in TV advertising in 2Q16. The group’s flagship channel TV3 saw gross adex recording strong growth of 28.8% QoQ (or 13.1% YoY to RM320m) in 2Q16 while TV9 grew 14.2% QoQ, partially offset the lower contribution of both 8TV and NTV7 channels. Besides, the lower base effect coupled with the renewed positive sentiment during the fasting month managed to entice advertisers to Harian Metro and Berita Harian, boosting the group’s newspaper segment’s gross adex to grow 31% QoQ in 2Q16.

Despite MEDIA’s adex revenue appears enticing in 2Q16, it still does not warrant a conviction upgrade yet given that the positive sentiment was mainly generated by specific sport event; thus, may not be sustainable in our view. Besides, the continued ambiguity of the hefty transmission fee structure may likely remain a major overhang to MEDIA’s share price performance despite management already reiterated its intention to stay in FTA platform and will continue to negotiate the transmission cost structure. Note that, MYTV was granted a license by the Government to operate the infrastructure and network facilities for Digital Terrestrial Television (DTT) services for 15 years. Incumbents have to pay RM12m (per channel) rental fee for broadcasting in standard definition (SD) format and RM25m for high definition (HD) channel as compared to MEDIA’s current annual transmission cost of c.RM40m. Having said that, should the uncertainty is removed, it could provide a short-term positive catalyst to MEDIA, in our view.

STAR – sequential flattish but continued to suffer on a YoY basis. The adex friendly UEFA Euro Cup event, to a certain extend, has also benefited STAR, which June’s gross adex reversed its downward trend and grew by 6% MoM, leading its 2Q16 growth rate to 0.4% QoQ (or -13.2% YoY to RM230m). Note that, STAR’s newspaper adex revenue generally contributed c.80%-85% to the group’s turnover.

Media Chinese International (MEDIAC) saw its gross print ads dipped by 4.1% QoQ (or -9.2% YoY to RM175m) in 2Q16, no thanks to lacklustre performance of Sin Chew daily and China Press. The uninspiring adex in the Chinese newspapers, to a certain extent, could be due to the prolonged guarded mode adopted by advertisers, compelling the publicists shifting some of their A&P budget to other alternative media types during the festival-centric month.

Cautious mode remains. We expect the adex sentiment to remain cautious in 2H16 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. All in, 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 Jul 2016