We reiterate our NEUTRAL call on the sector given the persistent lack of key earnings catalyst coupled with potentially more kitchen sinking exercise ahead. The country’s gross adex growth rate deteriorated to 9.3% YoY in CY17 as a result of the prolonged guarded spending mode and softer consumer sentiment. Moving forward, the prolonged weak consumer sentiment and rising cost of living are expected to curb the country’s adex outlook for CY18. We made no changes to all our media companies’ earnings estimates for now, pending the upcoming results season. ASTRO (OP, TP: RM2.90) remains our preferred pick in the sector in view of its relatively resilient earnings and decent dividend yield. We reiterate our OUTPERFORM call on STAR (TP: RM1.60) and UNDERPERFORM rating on MEDIA PRIMA (MEDIA, TP: RM0.55, as we believe there is still room for further kitchen sinking exercises in the coming months). Our MEDIA CHINESE’s (MEDIAC) rating, meanwhile, has been reduced to UNDERPERFORM (from MARKET PERFORM previously) as per our rating definition with an unchanged target price of RM0.35.

CY17 gross adex remained weak at RM6.4b (-9.3% YoY). The prolonged weak adex sentiment as a result of the rising cost of doing business continued to dampen the adspend during CY17. The weak adex performance was also aligned with the country’s latest consumer sentiment index, which continued to stay below the 100-point optimism threshold at 77.1 in 3Q17. The vulnerable gross adex in CY17 was led by all media types, except the Cinema segment (+30%), as the continued weak performance of the key segments, namely Newspaper (-22%), and FTA (-4%), overwhelmed the former. The radio segment, however, surged by 133% YoY to RM487m as Neilsen has resumed monitoring ASTRO’s radio adspend since October 2017 as well as updated all the previous quarters’ figures with the inclusion of ASTRO radio. If we compare like-for-like and exclude ASTRO radio’s numbers, the country’s CY17 gross adex (ex-Pay TV) would have dipped by 13.4% YoY (to c.RM6.1b), worse than our earlier estimate of -10.5% YoY. On a sequential performance basis, the 4Q17 gross adex improved marginally by 1.0% QoQ (vs. +8.4% QoQ in 3Q17) despite the last quarter of each calendar year being the traditional strongest quarter for adspend as a result of numerous holidays and seasonality factor. The sluggish adex performance in 4Q17 was driven mainly by FTA (+9.1% QoQ) and Radio (+2.9% QoQ) segments but was largely offset by the weak Newspaper segment (-7.5% QoQ) during the quarter.

Print media – turning into south again in 4Q17. All the print media incumbents’ gross adex declined in 4Q17 with MEDIA at the top of the list dipping 13.4% QoQ (to RM187m) followed by 10.4% QoQ decline (to RM133m) in STAR and 1.1% decline (to RM142m) in MEDIAC. The latest print media performance has reversed from its positive sequential improvement trend in the previous quarter (where both MEDIAC and STAR’s print gross adex have shown sequential improvement of 1.8%/5.3% QoQ in 3Q17), as advertisers appear to shy away from the print segment and focus more on the digital/TV media platforms to spur buying interest during the year-end festive and holiday season. The weak sequential performance suggested that the print media incumbents are set to report another challenging quarterly report card ahead.

MEDIA’s FTA TV gross adex improved by 9.4% QoQ. MEDIA’s gross TV adex reversed from its negative trend in the previous quarter and advanced by 9.4% QoQ in 4Q17. The strong performance was mainly driven by the higher contribution from all channels as a result of the year-end holiday and festivals as well as the seasonality factor. On the other hand, although the overall FTA TV adex remains weak, the ALHIJRAH TV channel bucked the trend and recorded a strong 76% YoY growth (to RM166m, a similar gross adex recorded by TV2 channel) in CY17. We believe the growth may be somewhat inflated in view of the fewer TV viewership in ALHIJRAH channel.

Lower ceiling prices for DTTB. Although the commercial negotiations on the transmission cost (under the Digital Terrestrial Television (DTT) Broadcasting service) has yet to be concluded (with MYTV), MCMC had recently proposed to regulate the DTT multiplexing prices. Under the Review of Access Pricing dated December 2017, the authority has decided to regulate the DTT transmission price for the year 2018-2020 based on per channel cost (in a range of RM6.1m-RM7.4m) and bandwidth cost per Mbps per year (at between RM293k to RM390k range) methodologies. The revised ceiling rates were lower than the earlier proposed rates (RM7m-RM9m p.a. for each SD channel; and RM11m-RM14m per year for the HD channel under the proposed pricing structure in Oct 2017) and MYTV may slash the annual fees for a single channel to be as low as RM5m, according to the recent press reports. Should the latter rate materialise, it could provide a much-needed catalyst to MEDIA as the group is currently paying c.RM30m/year for its transmission cost. All in, we understand that MEDIA is still undertaking a commercial negotiation with MYTV with an aim to lower the price to the current annual rate.

Challenging time remains in 2018. We expect the country’s gross adex (ex-Pay TV) to climb 4.5% YoY in CY18 (as a result of the low base effect and pre-14th General Election-led adex push) but the subdued adex outlook (as a result of the rising cost of doing business) coupled with heightened competition (on the rise of social networks and digital media) may keep the number in chChangeshange in consumer habits, behaviour, lifestyle and technology have reduced the barrier to entry of social networks that has created a massive disruption to the traditional media.

Source: Kenanga Research - 23 Jan 2018