We reiterate our NEUTRAL stance on the sector. The country’s gross adex growth rate declined by 10% (YoY) in CY16, in line with our expectation, as a result of the continued guarded spending mode. Moving forward, the prolonged weak consumer sentiment is expected to mire the country’s adex outlook for CY17 despite several adex-friendly events. There are no changes to all our media companies’ earnings estimates for now pending the upcoming result review. 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 ratings on STAR (TP: RM2.32) and Media Chinese (‘’MEDIAC’’, TP: RM0.59) while keeping UNDERPERFORM call on Media Prima (“MEDIA”, TP: RM0.90).

CY16 gross adex softened to RM7.1b (-10% YoY)…..and came in within our expectation. The vulnerable adex performance was mainly led by the prolonged weak adex sentiment as a result of rising cost of doing business. The guarded spending mode of the general public is not a surprise given that consumer sentiment index (CSI) has fallen to 70-78% range in 9M16, a similar level recorded during the Asian Financial Crisis. Meanwhile, customer fragmentation, technological advancement, and shift in advertisement to digital media also continued to pose great challenges to the incumbents. Besides, the persistently weak MYR (against USD) also led to some advertisers scaling back their A&P budgets, thus dampening the ad-spend appetite.

…..despite recording a positive monthly growth in December (+5.6% MoM to RM606m). The positive December’s adex performance was mainly driven by all media types, except the In-Store segment which dipped by 1.8% MoM. On CY16 basis, the total gross adex growth narrowed to -10% YoY, marking the second year of contraction (FY15: -9.1% YoY to RM7.9b), no thanks to the continued weak performance of the key segments, namely Newspaper (-13.1%) and Radio (-56.3%) albeit the fall being cushioned by the stable FTA (+1.7%) segment.

Another weak quarter ahead for the print players. The lacklustre gross adex performance in 4Q16 (-11.6% YoY; 2.7% QoQ) suggested that the local media players may likely face yet another challenging results season ahead. Based on our statistics, outlook for print media incumbents are likely to remain cloudy with STAR’s 4QCY16 gross print ads continuing to show weakness to RM207m (-4.2% QoQ; -19% YoY). On the other hand, MEDIAC’s gross print adex deteriorated by 12% YoY to RM171m despite its performance improving on a sequential basis, thanks to the higher contribution from all its print titles. MEDIA’s gross print adex, meanwhile, plunged by 22% YoY or 9.8% QoQ to RM237m as a result of the deteriorating adex performance in its entire print segment, aligned with the weak circulation numbers. On the FTA TV segment front, MEDIA’s gross adex advanced 2.7% YoY (or 7.6% QoQ) to RM771m in 4QCY16. The mild improvement on a year-on-year basis was mainly driven by the higher contribution from its flagship channel – TV3 (+7.3% YoY to RM328m) but partially offset by the weak performance of its other channels. In a nutshell, we expect MEDIA’s 4Q16 report card to remain uninspiring as a result of its weak print segment despite some early signs of improvement in its FTA segment.

Challenging 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.

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 revenues, 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 - 19 Jan 2017