We maintain our NEUTRAL call on the sector. The country’s gross adex growth rate deteriorated to 14% YoY in 1HCY17 as a result of the prolonged guarded spending mode coupled with softer consumer sentiment. Moving forward, the continued weak consumer sentiment is likely to stay 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 OUTPERFORM call on Media Chinese (MEDIAC, TP: RM0.65) and MARKET PERFORM rating on STAR (TP: RM2.35) while keeping UNDERPERFORM call on Media Prima (MEDIA, TP: RM0.85).

1HCY17 gross adex remained soft at RM3.1b (-14% YoY). The prolonged weak adex sentiment as a result of the rising cost of doing business continued to dampen the adspend during 1H17. The vulnerable gross adex in 1H (-14.3% YoY to RM3.1b) was led by all media types, except the Cinema (+44%) segment, as the continued weak performance of the key segments, namely Newspaper (-23%), and FTA (-2%), overwhelmed the former. The country’s consumer sentiment index, meanwhile, remained weak in 1Q17 (at below 80%, a similar level recorded during the Asian Financial Crisis), and we expect the vote of confidence to stay below the 100-point optimism threshold in 2Q17, no thanks to the growing stringent cost of doing business environment (i.e. foreign workers and tax regulation) as well as the cautious spending mode. On the quarterly performance basis, the 2Q17 gross adex surged by 14.4% QoQ, thanks to the strong performance of all key segments, namely Newspaper (7%), FTV (24%), Radio (32%), Magazines (12%) and InStore (3%) as a result of the lower base effect (where the 1Q of each calendar year is typically the lowest quarter as advertisers tend to conserve their A&P budget in the first two months of a new year to renegotiate new advert rates) as well as higher Hari Raya consumer spending.

MEDIA – showing signs of improvement sequentially but…. MEDIA’s 2Q17 gross FTV adex rebounded strongly from its seasonally low 1Q and grew by 22% QoQ (-0.6% YoY) to RM660m. The robust adex performance (on a quarter-to-quarter basis) was mainly driven by higher Malay-language channels – TV3 (40%) and TV9 (48%) but partially offset by the lower contribution of other Chinese-language dominated channels - 8TV (-10%) and NTV7 (-14%). The sturdy adex take-up in both TV3 and TV9 channels are not surprising given that consumer spending sentiment tends to be boosted by major festival celebrations (i.e. Rahmadan and Hari Raya festival). Similarly, the group’s print gross adex also recorded a strong adspend in 2Q (33% QoQ), thanks to the strong contribution of Malay advertisements. All in, despite the robust gross adex performance in 2Q, we remain doubtful on the group’s prospect given the management’s digital and transformation road path (to expedite digital transformation as well as widening the non-ads segment contribution) may require some gestation period over the short-tomedium term.

Cloudy adex sentiment remains in MEDIAC and STAR. Unlike MEDIA, both MEDIAC and STAR’s gross adex continued to be impacted by the weak adspend sentiment in 2Q17. MEDIAC was the worst hit post the CNY quarter and recorded lower gross adex of RM141m (-12% QoQ; -20% YoY) in 2Q17 while STAR suffered a mild dip of 1.1% QoQ (or -38% YoY) to RM141m during the same period. Notwithstanding, MEDIAC’s gross adex remained relatively resilient among the print incumbents in 1H17 (underpinned by the strong classified ads) and deteriorated 16% YoY as compared to 24%/38%YoY dip in MEDIA/STAR, respectively. Despite the weak adex sentiment, we believe both MEDIAC and STAR could draw some investors’ interest in view of the potential special goodies following assets disposals, should there is no major capex or acquisition in the pipeline. MEDIAC is expecting to record a net disposal gain of c.HKD358.6m (c.USD46.2m or RM0.12/share) after disposing its 73%-owned Hong Kong-listed One Media Group. STAR, on the other hand, is expected to receive a net proceed of RM359.6m (or RM0.487/share) post unlocking its investment in Singapore-listed Cityneon.

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 weaker; 4.7% YoY in CY17 after the 10% YoY dip in CY16.

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. We reiterate our OUTPERFORM call on MEDIAC (TP: RM0.65) and MARKET PERFORM rating on STAR (TP: RM2.35), in view of the potential special goodies ahead. Besides, our pessimistic view on MEDIA (UP, TP: RM0.85) remains unchanged as we believe the group require some gestation period during its digital and transformation road path.

Source: Kenanga Research - 20 Jul 2017