We made no changes on 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 remain the only saving grace for the sector with MEDIAC potentially rewarding shareholders further. We make no changes to all our media companies’ earnings estimate for now. ASTRO (OP, TP: RM3.00) 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: RM2.40) while keeping UNDERPERFORM rating on MEDIA (TP: RM0.94). Our MEDIAC rating is raised to MARKET PERFORM with a higher target price of RM0.67.

Mixed CY16 report cards. The sector incumbents’ CY16 results were mixed with STAR being the sole outperformer (mainly attributed to: (i) stronger event segment performance, (ii) lower-than-expected OPEX, and (iii) disposal gains of two radio stations), while MEDIA failed to meet expectations due to lower-than-expected advertising revenue and newspaper sales. The group was the worst hit in 4Q16 and recorded a core PATAMI of RM5.0m, bringing the full-year PATAMI to RM39m (-72% YoY). Apart of its one-off restructuring expenses of MR98m from the print segment, the retrenchment costs of RM20m also weighed on MEDIA performance in FY16. Likewise, MEDIAC also posted disappointing results, no thanks to the lower-than-expected print & travel segments’ performance as well as higher OPEX. ASTRO, on the other hand, is set to release its FY17 results end-March, and we expect the group to report a sequential flattish report card.

Challenging 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: (i) weak MYR against USD, (ii) rising cost of doing business, and (iii) a subdued global economy outlook (as a result of uncertainty post the Brexit vote and concerns on US trade policies with Trump’s presidency). All in, we are expecting the country’s gross adex (exPay TV) to be flat (on a YoY basis) in CY17 after the 10% YoY dip in CY16.

Finding new revenue streams. The persistent challenging adex outlook has prompted the industry incumbents to venture into the non-traditional media portfolio. Both ASTRO and MEDIA have entered the home shopping sector and recorded sturdy performances. In addition, MEDIA has also launched three brand new initiatives recently, aimed towards strengthening its leading position in the radio industry and realising new revenue opportunities. Besides, MEDIAC has also ventured into a new social office start-up company – CO3, although we do not expect any meaningful earnings contribution in the near-term.

MEDIAC – potential Angpow on the cards? MEDIAC has announced the completion of the conditions precedent (CP) agreements (relating to the proposed disposal of 73%-owned Hong Kong-listed One Media Group (“OMG”), which is primarily involved in the publishing of Chinese language lifestyle magazines and provides digital & outdoor media services in the Greater China region) in early of March with an aim to complete the whole exercise by 2H-2017. MEDIAC is expecting to record a net disposal gain of c.HKD358.6m (c.USD46.2m or RM0.12/share) with a minimal financial impact to its recurring income due to OMG’s loss-making status. In view of MEDIAC strong balance sheet (net cash of RM146m as of the end 3Q17) coupled with limited required capex moving forward, we do not discount that the group may reward its shareholders further. All in, while we are maintaining our MEDIAC’s FY17/18E core earnings forecasts, we have revised the reported net profit by -73%/+242% to RM72m/RM284m, respectively, post adjusting the completion of the disposal timeframe. With potential special dividend on the cards, we raised MEDIAC’s stock rating to MARKET PERFORM with a higher target price of RM0.67 (from RM0.56 previously) after lifting the targeted FY18E PER to 13.6x (5-year average PER) from 11.4x previously.

MEDIA (UP, TP: RM0.94 (from RM0.85 previously) after rolling over the valuation base year to FY18) – a “wild card” for rebound play. The group’s two core businesses (i.e. TV and Print Segment) are expected to remain challenging in FY17 in view of the subdued adex outlook. Having said that, we understand MEDIA has engaged an external consulting team to chart out the group’s direction with the findings expected to be finalised by end-1H17. Should the group’s earnings show some signs of solid improvement and/or the prolonged transmission cost structure (under the DTTB project) managed to be resolved in the nearterm, it could be a “wild card” for rebound play.

ASTRO (OP, TP: RM3.00) remains our favourite 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 homeshopping business and adex revenues are expected to provide cushion to earnings should any shortfall arises from its Pay-TV segment. MEDIAC, MEDIA and STAR’s (MP, TP: RM2.40 (from RM2.32 previously) after rolled over) 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 - 30 Mar 2017