We reiterate our NEUTRAL view on the media sector. Although the industry incumbents’ valuations are currently trading at near floor valuations, persistent lack of key earnings catalyst coupled with the on-going evolution of the traditional media may keep investors at bay. Decent dividend yield of 3%-8% appears to be the only saving grace for the sector. While we made no changes to all our media companies’ earnings estimates for now, we have revamped and taken a more conservative view in our valuation metrics. ASTRO (OP, DCF-driven TP: RM2.30) remains our preferred pick in the sector in view of its relatively resilient earnings and decent dividend yield. We downgraded our target price of MEDIA (UP, TP: RM0.400 vs. RM0.530 previously) and STAR (from RM1.60 to RM1.25) with the latter’s rating changed to MARKET PERFORM (vs. OUTPERFORM previously). Maintained UNDERPERFORM call on MEDIAC with unchanged TP of RM0.350, despite changing the valuation methodology to P/BV from PER.

Still in the woods. The sector incumbents’ report cards in CY17 remained uninspiring, mainly due to the prolonged weak advertising revenue (as a result of subdued adex outlook on poor consumer spending) as well as various impairment charges. STAR’s 4Q17 results came in above expectation mainly due to our overly conservative forecast and lower taxation. MEDIA, on the other hand, was slammed in FY17 recording a LATAMI of RM153m owing to lower advertising revenue, higher OPEX and a combination of RM415m exceptional item on the impairment of its associate MNI; ERS payment; and impairment of various PPEs & intangible assets. MEDIAC’s 3Q18 result, meanwhile, came in within our, but below the streets’, expectation, with 9M18 core PATAMI of RM34m as it continued to be weighed down by publishing and printing segment. In addition, ASTRO’s FY18 numbers also failed to deliver due to its softer topline and higher OPEX. The group’s operating environment is expected to continue facing challenges given subscribers’ tendency to downgrade their TV subscription plans, leading the group’s TV subscription revenue to record negative sequential growth for four consecutive quarters.

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 creating massive disruption to the traditional media), the total gross adex continued to remain weak, by 19% YoY to RM426m in 1M18. Moving forward, while we expect the gross adex (ex-Pay TV) to climb 4.5% YoY in CY18 (vs. -9.3% YoY in CY17) as a result of the low base effect, pre-14th General Election and major sport events-led adex push, the current adex visibility still remains low based on our last check with the industry players. Indeed, 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 check. Besides, change in consumer habits, behaviour, lifestyle and technology have reduced the barrier to entry of social networks that has created massive disruption to the traditional media.

Could MEDIAC’s arbitrage opportunity sustain? Both HKEX and Bursa Malaysia-based MEDIAC’s share prices have performed sturdily in late-March due to the IPO of Most Kwai Chung (“MKC”, in which MEDIAC holds a 7.5% stake post listing), witnessing overwhelming interest in the latter’s IPO subscriptions. While the current share price differential in both exchanges could still provide arbitrage opportunities to MEDIAC’s shareholders, one should take note that it may take weeks to complete the share transfer and registration (to different exchanges) as well as to settle the stamp duty. Thus, the arbitrage opportunity may potentially diminish by then given the high trading volatility in HKEX. Indeed, the share price differential has started to narrow from >200% premium (on 20- March) to <50% after MKC debuted in HKEX on 28-March (figure 1 and 2). Besides, the negligible financial impact (to MEDIAC due to its insignificant stake in MKC) could also cool down the irrational trading sentiment drastically.

Revamping valuation metrics. We have changed our MEDIAC’s PER valuation methodology to P/BV given the group’s (similar to other peers) earnings are set to remain volatile due to the low adex visibility, subdued adex outlook and the shift to digital media. Despite change in the valuation methodology, our MEDIAC target price remains at RM0.350, based on a targeted FY19 P/BV of 0.76x (implied -2.0x standard deviation below its 3-year mean). Meanwhile, we also adopted a more conservative time frame of 3- year (vs. 5-year previously) into our P/BV valuation metric for all the media companies in order to have a better reflection to the current industry development. In addition, we also apply a floor valuation to all the media companies under our coverage to reflect the current tough operating environment facing by the sector’s incumbents as well as to price-in potential earnings risks ahead. With that, we have lowered our STAR’s target price to RM1.25 (vs. RM1.60 previously) after reducing the targeted FY18 P/BV to 1.11x (-2.0x standard deviation below its 3-year mean) from 1.44x (-1.0x standard deviation below its 5-year mean) previously. Meanwhile, we also take this opportunity to lower our STAR’s FY18/19E annual dividend per share to 9.0 sen each (vs. 12.0 sen previously) to align with our conservative stance. Similarly, our MEDIA’s target price is also revised to RM0.400 (from RM0.530 previously) after lowering the targeted FY18 P/BV to 0.6x (-2.0x standard deviation below its 3-year mean) from the initial 0.76x (- 2.0x standard deviation below its 5-year mean).

ASTRO (OP, TP: RM2.30) remains our preferred pick for the sector for its relatively resilient earnings and decent dividend yield (c.5%). While we believe overdependence on the local TV & print advertising revenue as well as deteriorating print circulation coupled with the lack of digital presence were the key downfall factors of all media incumbents, the evolution of the traditional media coupled with new digital venture could see the players experiencing some gestation periods over the short-to-medium term.

Source: Kenanga Research - 6 Apr 2018