We reiterate our NEUTRAL stance on the sector. July’s gross adex deteriorated by 20.7% MoM, lowering its YTD growth to -9.0% YoY (vs. YTD June of -8.9%) as a result of the shortened number of working days coupled with softer sentiment arising from a weak MYR. Meanwhile, industry observers also believed the media consumption habits have altered somehow lately where advertisers seem prepared to reshuffle adspends to the relatively cheaper media types during the challenging economic environment. 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 STAR (TP: RM2.37) and Media Chinese International (MEDIAC, TP: RM0.73) while keeping UNDERPERFORM rating on Media Prima (MEDIA, TP: RM1.35).

Back to the fading trend. The country’s gross adex failed to sustain its growth momentum and dipped by 20.7% in July due to the shortened number of working days as a result of the Hari Raya Puasa festival. On top of that, the Ringgit has remained in a waning position for most of July as Crude oil prices resumed its decline coupled with a troubled state investment fund that weighed down on sentiment. The vulnerable gross adex in July (-20.7% MoM to RM553m) was mainly led lower by all media types, except the FTA (+10.6%) and Cinema (+1.9%) segments. On YTD July basis, the total gross adex growth contracted to -9.0% YoY (vs. YTD June of - 8.9% YoY) to RM4.1b, no thanks to the continued weak performance of the key segments, namely Newspaper (-12.4%) and Radio (-51.2%) albeit the fall being cushioned by the stable FTA (+2.0%) segment.

News paper YTD July’s gross adex dipped by 12.4% YoY to RM2.1b as a result of the continued sluggish performance in all language segments (BM (-12.5%), Chinese (-10.9%) and English (-14.9%)) on the back of weaker consumer sentiment. Indeed, the segment’s gross adex has continued contracting (on a year-on-year basis) since October 2014, prompting newspaper incumbents venturing or focusing into the non-traditional media segments (i.e. e-commerce, home shopping and interactive exhibition businesses). Meanwhile, industry observers also believed the media consumption habits have altered somehow lately where advertisers seem prepared to reshuffle adspends to the relatively cheaper media types (i.e. radio, outdoor) as opposed to the traditional TV/newspaper segments during the challenging economic environment.

Challenging 2Q16 quarters. Media had released its 2Q16 numbers last week where the group’s net profit deteriorated by 28% to RM45.2m in 1H16 despite revenue merely weakened by 6%. The softer numbers were mainly due to the decline in newspaper sales and advertising revenue from both TV and print, reflecting the vulnerable consumer and advertising spending. Its EBIT margin, meanwhile, has also diminished to 8.8% (vs. 13.6%) in 1H16, impacted by higher overhead cost and start-up costs from its home shopping business.

MEDIAC saw its gross print ads dipping 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 to shifting some of their A&P budgets to other alternative media types during the festival/event-centric month.

STAR’s ads revenue (which accounted for c.80%-85% to the group’s turnover), meanwhile, is expected to stay flat sequentially but continued to suffer on a YoY basis (where Nielsen reported STAR’s gross adex to growth 0.4% QoQ but - 13.2% YoY to RM230m in 2Q16). The uninspiring print division performance, however, is expected to be cushioned by the strong performance of Cityneon (a 52.57% subsidiary) where the group’s 1H16 revenue has improved by 13.8% YoY to SGD46.3m with PBT of SGD5.7m (vs. –SGD0.7m a year ago). The street is targeting STAR to report RM115m (vs. our RM119m forecast) net profit for FY16, which we now believe the numbers may be somehow underestimated judging from the sterling performance of Cityneon. We will revisit our numbers post the release of the 2Q16 results, set to be announced next week.

Gloomy adex outlook remains. We continue to 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 2.0% 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 Aug 2016