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 yields of 5-8% appear to remain the only saving grace for the sector with MEDIAC and STAR potentially rewarding shareholders further. There are no changes to all our media companies’ earnings estimate. 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 OUTPERFORM call on MEDIAC (TP: RM0.65) while keeping UNDERPERFORM rating on MEDIA (TP: RM0.85) and STAR (TP: RM1.85).

Disappointment continues. The sector incumbents continue to post disappointing report cards in 1QCY17, mainly owing to the prolonged weak advertising revenue (as a result of subdued adex outlook on poor consumer spending sentiment and the shift from traditional to digital media) as well as start-up losses on new initiatives. MEDIA was the worst hit in 1Q17 and recorded a LATAMI of RM39m (as a result of lower-than-expected advertising revenue and persistently high overhead cost) followed by STAR, where the negative surprises were mainly caused by its lower Print and Radio segments’ contributions as well as start-up losses incurred in its new OTT venture. MEDIAC, on the other hand, released full-year results that appeared relatively decent as compared to its peers despite its performance. ASTRO’s 1Q18 results, meanwhile, came in within expectations as the lower unrealised forex gain and stable margins have offset the weak top-line performance, leading the group’s core PATAMI to grow 5% YoY.

Challenging adex 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 unlikely to provide any strong boost to the traditional media during the transformation road path. Changes in consumer habits, behaviour, lifestyle and technologies have reduced the barrier to entry of social network and created massive disruption to the traditional media. Thus, in view of the subdued adex outlook (as a result of the rising cost of doing business) and heightened competition (that followed the emergence of social networks), we believe the country’s gross adex (ex-Pay TV) will continue to face a challenging time and weaken by 4.7% YoY in CY17 after the 10% YoY dip a year ago. Note that, the country’s gross adex (ex-Pay TV) has dipped 13.6% YoY to RM2.48b during the first five-month of 2017.

Potential special goodies from disposals. STAR’s shareholders could potentially receive a special dividend (of up to RM0.487/share) should the proposed disposal of 52.51% stake owned in Singapore-listed Cityneon is granted an approval from its stakeholders during the upcoming EGM in 7th July. To recap, STAR has entered into a conditional share purchase agreement with Lucrum 1 Investment for the proposed disposal of its entire stake in its event arm-Cityneon, for SGD0.90/share (or equivalent RM360.18m). The disposal is set to allow STAR to unlock its investment in Cityneon and concentrate on the expansion of its primary business activities. Having said that, in view of the decent net proceeds (c.RM359.6m) arising from the proposed disposal, we do not discount potential special goodies should there is no major capex or acquisition in the pipeline. Separately, a potential “angpow” could also be on the cards for MEDIAC should the group manage to dispose its 73%-owned Hong Kong-listed One Media Group (which is primarily involved in the publishing of Chinese's language lifestyle magazines and provides digital & outdoor media services in the Greater China region) in 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 lossmaking status. In view of the limited required capex ahead, we do not discount that the group may reward its shareholders further.

MEDIA – still not out of the wood yet. Over dependence on the local TV & print advertising revenue as well as the lack of digital presence had dampened MEDIA’s financial performance in the past few quarters. While we concur with the management’s digital and transformation road path (to expedite digital transformation as well as widening the non-ads segment contribution), the evolution of the traditional media could continue seeing the group experiencing some gestation period over the short-to-medium term.

ASTRO (OP, TP: RM3.00) remains our preferred 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 decent homeshopping business and adex revenues are expected to provide cushion to earnings should any shortfall arises from its Pay-TV segment. We reiterated our OUTPERFORM call on MEDIAC (TP: RM0.65, in view of the potential special dividend) and UNDERPERFORM rating on MEDIA (TP: RM0.85). Our STAR’s rating, meanwhile, remains as UNDERPERFORM with an unchanged target price of RM1.85. Having said that, we are likely to review our call and target price should the group manage to receive shareholders’ approval (in the upcoming EGM on 7-July) to dispose its event arm, which could potentially spark the special dividend angle.

Source: Kenanga Research - 7 Jul 2017