We reiterate our NEUTRAL view on the media sector in view of the persistent lack of key earnings catalyst coupled with potentially more kitchen sinking exercise ahead. The prolonged weak consumer sentiment and rising cost of living are expected to curb the country’s adex outlook for CY18. Although newsprint prices are expected to trend up, the impact could partially be cushioned by the stronger Ringgit. We have revised our newsprint price and USD/MYR assumptions to align with the latest trends. Post model updates, we reiterate our ASTRO’s TP at RM2.90 but upgrade its rating to OUTPERFORM. We have trimmed our target prices for STAR to RM1.60 (with unchanged OUTPERFROM rating) and MEDIAC to RM0.35 (maintained MARKET PERFORM rating) but kept MEDIA’s TP at RM0.55 with an unchanged UNDERPERFORM call.

Still in the dark. The sector incumbents’ report cards in 3QCY17 remained disappointing, mainly due to the prolonged weak advertising revenue (as a result of subdued adex outlook on poor consumer spending) as well as losses on new initiatives. Both MEDIAC and MEDIA continued to post disappointing report cards due mainly to the lower advertising revenue and higher OPEX. Besides, a combination of RM195m exceptional item on the impairment of its associate MNI and ERS payment also dented MEDIA’s earnings, resulting in LATAMI of RM78m in 9M17. STAR’s 3Q17 results, on the other hand, came in above expectation, mainly due to our overly conservative forecast post disposal of Cityneon. Despite having no near-term catalysts in place, the deeper-than-expected recent share price correction could provide some bargain hunting opportunities. In addition, while ASTRO’s 9M18 numbers came in within estimate, its operating environment is expected to get more challenging ahead given the group’s Pay TV subscribers continuing to downgrade their TV subscription plans due to the current subdued consumer sentiment.

Persistently weak ad spends. Given prevalent poor consumer sentiment coupled with structural changes in consumers consumption behavior (which have reduced the barrier to entry of social network and created massive disruption to the traditional media), the total gross adex continued to sink, by 16% YoY to RM5.1b in 10M17. Moving forward, while we believe advertising activity could pick up slightly in the remaining months, the subdued adex outlook (as a result of the rising cost of doing business) and heightened competition (that followed the emergence of social networks and digital media) are set to continue to weigh down on the country’s gross adex (ex-Pay TV) performance. We continue to expect the gross adex (ex-Pay TV) to dip by 10.5% YoY in CY17 but climb 4.5% YoY in CY18 as a result of the low base effect and pre-14th General Election-led adex push.

Higher newsprint prices but partially cushioned by stronger Ringgit. Newsprint prices have been trending higher gradually since early 2017 to USD 550-600/MT level in the recent months (supported by modest tightening in the global market balance following some printing plants closure in Asia and Europe coupled with cost pressures), posing earnings risk to print-based companies. Having said that, the earnings risk could somehow be mitigated by the recent stronger MYR. In view of the rising newsprint price trend coupled with stronger MYR, we have revised our MEDIAC and STAR’s CY17E/CY18E newsprint price and USD/MYR assumptions to USD570/MT and RM4.10 (from USD520/MT and RM4.30 previously), respectively. All in, we have trimmed our MEDIAC’s FY18E/FY19E PATAMI by 6.3%/9.0%. Similarly, our STAR’s FY17E/FY18E numbers are also lowered by 1.4%/6.1%, respectively. Our earnings assumptions in MEDIA, however, remain unchanged given that we have earlier revised our expectation to align with the current trend.

Key strategies for companies in 2018. MEDIA is expected to conduct more kitchen sinking exercises in coming quarters before the dusts settle in mid-2018. STAR, meanwhile, is expected to continue focusing on its OTT (via Dimsum) venture and search for M&A opportunities to recoup the loss of earnings post the completion of divestment in Cityneon. Similarly, MEDIAC is seen continuing to improve its digital platform; however, the potential earnings impact may be too small to offset the decline in its traditional print segment. ASTRO, on the other hand, is expected to record higher content cost (as a result of a higher number of sporting events) in FY19 and re-position its business with emphasis towards personalization, mobility and interactivity with customers via: (i) digitalising its legacy business, (ii) rapidly scaling digital ventures via its e-commerce platform, and (iii) collaborative partnership with leading content players.

ASTRO (OP, TP: RM2.90) remains our preferred pick for the sector for its relatively resilient earnings and decent dividend yield (c.5%). While we believe over dependence on the local TV & print advertising revenue as well as the lack of digital presence was the key downfall of all media incumbents, the evolution of the traditional media coupled with new digital venture could lead the players to experience some gestation periods over the short-to-medium term. Post earnings update, we have revised our target price for STAR to RM1.60 (from RM1.65 previously and maintained its OUTPERFORM rating due to the recent sharp share price correction which could provide some bargain hunting opportunities. Besides, with a potential >8% dividend yield, it could attract yield-hungry investors) and MEDIAC to RM0.35 (from RM0.40 previously and maintained MARKET PERFORM call as a result of its decent dividend yield (c.5%) despite lack of immediate earnings catalyst). Meanwhile, we reiterate our UNDERPERFORM call on MEDIA (TP: RM0.55) and keep our ASTRO’s TP unchanged at RM2.90. ASTRO rating, however, has been raised to OUTPERFORM (from MARKET PERFORM previously) as bargain hunting opportunity could potentially arise after the group’s share price weakened by 7.5% since our last downgrade in early last December.

Source: Kenanga Research - 5 Jan 2018