We are keeping our NEUTRAL view on the media sector due to the lack of key earnings catalysts. Decent dividend yield of 4%-7% appears to be the only saving grace for the sector. The prolonged weak consumer sentiment is expected to mire the country’s adex outlook for the remaining months despite entering the traditional strong adex friendly quarter. DTT transmission fee structure, meanwhile, remains vague as MEDIA is still in-talk to negotiate the rate although MYTV has agreed to lower its fee recently. New ventures into non-traditional media is set to gradually complement the incumbents’ existing business which is currently exposed to the unsettling economic and market sentiment. All in all, 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: RM1.35), and STAR (TP: 2.60) while keeping UNDERPERFORM rating on MEDIAC (TP: RM0.60).

Disappointed 2QCY16 report cards. The sector incumbents’ 2QCY16 results were disappointing with ASTRO being the sole outperformer (mainly attributed to its lower-thanexpected OPEX and finance costs). STAR’ results came in largely within expectation, thanks to better-than-expected Cityneon performance, albeit largely offset by the persistently weak print segment contribution. Both MEDIAC and MEDIA failed to meet expectations as a result of lower advertising revenue coupled with thinner margins. 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 doing business) coupled with higher OPEX were the main common issues faced by the incumbents during the quarter.

Uninspiring Adspend continues. Nielsen media recently reported that the country’s YTD-August gross adex deteriorated by 9.6% YoY to RM4.7b (vs. YTD-July’s -9.0% YoY), following another lacklustre growth of -1.7% MoM growth in August. The YTD-August decline is suggesting that consumer sentiment in the first eight months of 2016 remains dawdling as the prolonged weak adex sentiment, customer fragmentation, technological advancement, and shift in advertisement to digital media continued to pose great challenges to the incumbents. The biggest adex contributor - newspapers, was lowered by 12.6% to RM2.4b on YTD-August with weakness in all medium languages. On the free-to-air TV segment front, MEDIA’s gross adex continued its deterioration trend in August and softened by 12.3% MoM, widened its YTD losses to RM1.58b (-3.3% YoY). The persistent weak consumer and business sentiment coupled with uncertainty caused by US Fed policy as well as upcoming US presidential election will continue to fuel market volatility, and may lead advertisers to continue adopting more guarded approaches in the next few months. Followed an uninspiring set of corporate earnings in 1H16, we have lowered our CY16 gross annual adex growth target to -8.8%.

Battle remains over transmission fees. Press has earlier reported that MYTV Broadcasting S/B, an infrastructure and network service provider, has agreed to lower its fees for digital terrestrial television (DTT), following complaints from FTA players. The annual fee of each SD channel is proposed to be reduced to ‘a high range of seven figures’ (vs. RM12m previously) while HD channels fee will be based on the programmes’ required bandwidth rather than the RM25m proposed earlier. The latest proposed fees, however, has yet to coincide with MEDIA as the group is still in talks to negotiate the rates. The move is not a surprise given that the revised proposed fee still hhasa big gap as opposed to cthe current nnual transmission ffees(c.RM40m) paid by MEDIA. Thus, should the group manage to negotiate the fee further and close to its current rate, it could provide a positive catalyst to MEDIA, in our view. Note that, MYTV is set to launch its digital services in August 2016 while the targeted total analogue switch off date for Malaysia is scheduled at end-June 2018.

Non-traditional media segment continued to shine. In light of the persistently weak adex outlook (as a result of cautious spending by both consumers and businesses due to the challenging economic outlook and rising cost of living), industry incumbents have ventured into the non-traditional media portfolio to further diversify its earning base since FY15. Both ASTRO and MEDIA have entered into the home shopping segment while making good progress in their content creation business. The former has recorded RM138m turnover (or c.5% to the group’s topline) in 1HFY17, on-track to achieve RM300m turnover for the full-year. The latter, meanwhile, recorded a maiden turnover of RM19m in 2Q16 and continued to aims to hit more than RM150m turnover in FY17 and break even a year later. STAR, on the other hand, has expanded its event division aggressively via Cityneon (a 52.3% owned subsidiary listed in Singapore), which controlled Victory Hill Exhibitions Ptd Ltd that holds licensing rights for both Avengers and Transformers brands in partnership with Marvel Entrainment and Hasbro. The division has recorded RM46m (+14% YoY) turnover in 1H16 with PBT returning to the black at RM6m. MEDIAC remains focused on its core media portfolio while expanding its digital platform to facilitate its print media segment. The group’s e-commerce platform, "Logon", has continued to gain traction albeit earnings contribution is still negligible for now. MEDIAC’s travel & travel-related services accounted for c. 25% (FY16: 24%) of the group’s topline in 1QFY17 but with thinner PBT margin of 6.2% (vs. 9.0% a year ago).

Source: Kenanga Research - 7 Oct 2016