Recent 3QCY19 total gross adex recorded by Nielsen continued to paint weakness in the traditional media space, with growing preference tilted towards digital platforms for advertising needs. Casualties are the usual suspects namely FTA TV and newspapers, seeing declines of 13% and 18%, respectively, on a 9MCY-YTD basis, while total industry value of RM4.32b remained stagnant YoY. Looking ahead, 4QCY19 could post better results with the holiday season and year-end festivities, but we do not anticipate traditional platforms to register any meaningful recovery due to the persistent digitalisation of advertisements. Post-update, we maintain our NEUTRAL view on the sector, but upgrade our call for STAR (TP: RM0.570) to OUTPERFORM from MARKET PERFORM, in lieu of the recent sell-down on poor sentiment, likely spurred by the closure of its Malay language contemporary. We leave the calls for our other media coverages unchanged.

Digital transition. Nielsen has released its 3QCY19 total gross adex statistics, which is also the third quarter where digital-adex is tracked as a component. On a YoY basis, 9MCY19 total gross adex value of RM4.32b was on a flattish decline (-0.2%) as compared to 9MCY18. Stripping off digital adex (comprising of c.12-13% of total gross adex), we would instead see that the industry registered a 13% loss in value. This demonstrates the continual transition from traditional medium channels to more interactive and engaging digital channels to fulfil advertising needs. However, it might not be fair to conclude that overall advertising activities are on a decline, as digital advertising may be more cost-efficient channels for advertisers. Free-to-air television (FTA TV) (-13%) and newspapers (-18%) remained the largest losers in adex market share. Only Cinemas (+17%) registered growth in adex revenue, which could be attributed by heightened film releases during the year. That being said, the Cinema platform constituted less than 4% of the total gross adex in both 9MCY19 and 9MCY18.

QoQ, 3QCY19 total gross adex fell 5% to RM1.45b from 2QCY19. This did not come as a surprise as 2QCY periods are seasonally boosted by Hari Raya celebrations, to the benefit of conventional advertising channels. Key platforms of FTA TV and newspapers declined by 5% and 6%, respectively. Even digital adex was not spared, declining by 4%.

Outlook. 4QCY19 could paint a brighter scene with the help of the holiday seasons and year-end festivities to keep consumer activity vibrant. However, we believe that this does not stop the continuous growth of digital channels as a preferred option for advertisers to reach their target audiences. That being said, local media players are acknowledging this paradigm shift and are working to join the fray. With MEDIAC’s cost savings measures possibly serving as a means to drive new revenue ventures, STAR’s digital roadmaps include expanding its existing platforms (i.e. Star Online, Star Property, Dimsum) and to enable crossselling opportunities while MEDIA looks towards strategic acquisitions to enlarge its digital footprint in addition to strengthening its non-advertising revenue streams (i.e. film, commerce). On a separate note, the recent closure of Utusan Malaysia Bhd (and its newspaper brands Utusan Malaysia and Kosmo!) could very likely put a dent on the total newspaper ad spend. While we do not discount a spill-over of readership to other publications in the Malay language (i.e. Berita Harian), we reckon there would still be a loss in overall value owing to its wide footprint (estimated to make up a third of total Malay newspaper copies distributed).

Maintain Neutral on the Media sector. The sector will continue to operate in a challenging landscape. Still it may not be all doom and gloom as industry players strive to maintain their market positions and profitability. With this sector update, we take this opportunity to upgrade STAR (TP: RM0.570) to OUTPERFORM from MARKET PERFORM. While the recent sell-down could be a result of the ceasing of its abovementioned newspaper print peers dragging down sentiment, we believe that our unchanged valuations of 0.52x FY20E P/NTA (-1.5SD over its 3 year mean) is fair, already discounted adversities in near term earnings outlook. The recent appointment of a new CEO with media agency background could introduce fresh ideas to revitalise the group’s long-term strategies. Our other calls are left unchanged for now.

Source: Kenanga Research - 21 Oct 2019