We are keeping our NEUTRAL view on the media sector due to the lack of key earnings catalysts. The prolonged weak consumer sentiment is expected to mire the country’s adex outlook for CY17 despite several adex friendly events. Decent dividend yield of 4%-7% appears to be the only saving grace for the sector. We make no changes to all our media companies’ earnings estimate for now. ASTRO (OP, TP: RM3.02) remains our favourite pick in the sector in view of its relatively resilient earnings and decent dividend yield. We reiterate our MARKET PERFORM call on STAR (TP: RM2.32) while keeping UNDERPERFORM rating on MEDIA (TP: RM0.90). Our MEDIAC target price is maintained at RM0.59, but its rating is raised to MARKET PERFORM as its share price has slumped 20% since our last downgrade in August.

Another disappointing 3QCY16 report cards. The sector incumbents’ 3QCY16 results were disappointing mainly dragged by the prolonged weak advertising revenue (as a result of economic uncertainties and poor consumer sentiment) as well as high OPEX. MEDIA was the worst hit among the peers in 3QCY16, recording a core LATAMI of RM4.8m. Besides, its one-off restructuring expenses of MR105m from the print segment also weighed on MEDIA performance in 3QCY16 leading the group to record a LATAMI of RM109m. STAR and MEDIAC’s 3QCY16 results, meanwhile, were pulled down by the feeble top line performance and thinner margins, but the former was partially cushioned by the stronger performance of its event division. ASTRO’s 3Q17 result, on the other hand, came in within expectation, mainly underpinned by higher e-commerce and adex revenues. Its Pay-TV segment churn rate, however, hit another record high level at 12.4% (vs. 10.9% in 2Q17) as a result of weak consumer spending sentiment and growing piracy trend.

Uninspiring adspend continues. Nielsen Media recently reported that the country’s YTD-November gross adex deteriorated by 10.0% YoY to RM6.47b (vs. YTD-October: -9.6% YoY) 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 lower by 13.2% to RM3.3b YTD-November with weakness in all medium languages. On the financial front, print players are likely to continue facing a challenging quarter in 4Q16 judging from the weakening QTD-November gross adex performance where MEDIA, MEDIAC and STAR have dipped by 25%/22%/14% YoY, respectively. On the free-to-air TV segment front, MEDIA’s QTD-November gross adex has bucked from the earlier deterioration trend and climb 3.1% YoY to RM511m. The growth, however, is expected to be offset by the higher discount rate given the shift from the traditional media channels to more quantifiable, data centric and cost effective mediums like Internet and mobile advertising.

Tough time remains in 2017 despite several adex friendly events. While the country’s 2017 adex sentiment is set to be supported by: (i) ASEAN@50: Golden Celebration campaign, (ii) 29th Sea Games, (iii) 9th ASEAN Para Games, and (iv) a potential 14th General Election, these feel-good factors, however, are likely to be offset by the: (i) weak MYR against USD, (ii) rising cost of doing business, and (iii) subdued global economy outlook (as a result of uncertainty post the Brexit vote and concerns on US trade policies following Trump’s presidential victory). All in, we are expecting the country’s gross adex (ex-Pay TV) to be flat (on a YoY basis) in CY17 after the 10% YoY dip in CY16.

Newsprint price is set to remain stable but… Despite the newsprint prices (the biggest cost component for print media) expected to remain firm at the c.USD500/MT range in CY17 (as a result of the weak demand and subdued global economy outlook), the print players (i.e. MEDIA, MEDIAC and STAR) may not benefit from the current steady cost structure given that the newsprint prices (in MYR terms) have climbed to c.RM2,200/MT from RM2,000/MT previously as a result of the weak USD/MYR exchange rate. That said, the print players need to reduce newsprint consumption and continue migrating readers to the e-paper segment in order to curb newsprint cost. It may have an adverse impact to the print players should MYR continue to depreciate against USD.

ASTRO remains our top pick for the sector for its relatively resilient earnings and decent dividend yield (c.5%). The challenge, however, is expected to come from growing piracy trend, which could continue to rise as a result of rising cost of living and better viewing experience from higher Internet speed. Having said that, the group growing home-shopping business and adex revenues are expected to provide the cushion to its earnings should any shortfall arises from its Pay-TV segment. MEDIAC, MEDIA and STAR’s print ads revenue, meanwhile, are expected to continue to face headwinds in CY17 as adex sentiment is expected to remain cautious due to economic uncertainties. Having said that, STAR’s Event division is expected to remain robust, driven by its Avengers and Transformers IP rights.

Source: Kenanga Research - 5 Jan 2017