We maintain our NEUTRAL call on the sector. The country’s gross adex growth rate deteriorated by 16% (YoY) in 1QCY17 as a result of the continued guarded spending mode coupled with softer consumer sentiment. Moving forward, the prolonged weak consumer sentiment is likely to continue to mire the country’s adex outlook for CY17 despite several adex-friendly events. We made no changes to all our media companies’ earnings estimates. 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 ratings on STAR (TP: RM2.40) and Media Chinese (MEDIAC, TP: RM0.67) while keeping UNDERPERFORM call on Media Prima (MEDIA, TP: RM0.94).

1QCY17 gross adex remained weak at RM1.4b (-16% YoY). The vulnerable adex performance was mainly dampened by the prolonged weak adex sentiment as a result of rising cost of doing business. The continued guarded spending mode of the general public is not a surprise given that consumer sentiment index (CSI) is still below 80% (a similar level recorded during the Asian Financial Crisis), albeit the latest quarterly index has shown some improvement to 76.6 (+5.1% YoY; +9.7% QoQ). Meanwhile, customer fragmentation, technological advancement, and shift in advertisement to digital media also continued to pose great challenges to the incumbents. On the quarterly performance basis, the 1Q17 gross adex has plunged by 19% QoQ, no thanks to the weak performance of all key segments, namely Newspaper (-19%), FTV (- 20%), Radio (-28%), Magazines (-31%) and In-Store (-7.3%) as a result of the higher base effect (where the 4Q of each calendar year is typically an adex-friendly quarter due to various festival celebration and promotions). The Cinema segment, meanwhile, bucked the trend and recorded 23% QoQ growth in 1Q17.

Consumer Sentiment Index improved but no vote of confidence, according to Malaysian Institute of Economic Research (MIER). The latest CSI has improved to 76.6 (+6.8 points QoQ) but remains below the 100-point optimism threshold. The economic research outfit believes the improvement was mainly led by the stable employment income, improved financial and job expectations, moderate concerns on rising prices but with cautious spending mode. All in, while we are encouraged by the mild improvement in CSI, the adex sentiment, we believe, could only be improved should the index strengthened to above the optimism threshold.

Another headwind ahead for the print players. The lacklustre print segment’s gross adex performance in 1Q17 (-23% YoY; 19% QoQ) suggested that the local media players may likely face yet another weak results season ahead. Based on our statistics, outlook for print media incumbents are likely to remain cloudy with STAR’s 1QCY17 gross print ads continuing to show weakness to RM143m (-31% QoQ; -38% YoY). Having said that, despite the weak gross print adex numbers, STAR’s Event division’s outlook is expected to remain robust, and could provide a much-needed cushion to earnings. On the other hand, MEDIA’s gross print adex plunged by 25% YoY or 23% QoQ to RM184m as a result of the deteriorating adex performance in its entire print segment, aligned with the challenging circulation numbers. MEDIAC’s gross print adex, meanwhile, was lower by 13% YoY or 7% QoQ, to RM160m. On the FTA TV segment front, MEDIA’s gross adex softened by 5.7% YoY (or 19.6% QoQ) to RM620m in 1QCY17. The moderate deterioration on a year-on-year basis was mainly due to the lower contribution from all channels but partially cushioned by its flagship channels – TV3 and 8TV, which merely softened by 2.9% YoY (to RM241m ) and -4.9% (to RM116m), respectively, as compared to a double-digit decline in other channels.

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, and (ii) rising cost of doing business. All in, we make no changes to our gross adex (ex-Pay TV) forecast where we expect the number to be flat (on a YoY basis) in CY17 after the 10% YoY dip in CY16.

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’s 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 print ads revenues, meanwhile, are expected to continue to face headwinds in CY17 as adex sentiment is expected to remain cautious. Having said that, STAR’s Event division is expected to remain robust, driven by its Avengers and Transformers IP rights

Source: Kenanga Research - 20 Apr 2017