We maintain our NEUTRAL call on the media sector. With disruptive industry headwinds (particularly with the growing digitalisation of advertising), players inevitably will face market structural changes and eventually the need for comprehensive business restructuring. Although this could cause fluctuating impact in the near term, it is essential for the players’ long-term survival. The general adex outlook will see diminishing relevance for conventional media platforms, albeit some companies may be able to ride the storm better than others. We do not think the introduction of the 6% service tax on foreign digital services providers would be a trend changer as digital platforms remains the most affordable and effective alternative to consumers and advertisers. Our preferred pick for the sector remains to be ASTRO (OP, TP: RM2.00), which commands high dividend yields (>7%) and is trading at cheap valuations relative to the sector. On the other hand, we raise our TP for MEDIAC to RM0.240 (from RM0.200) on higher valuations but downgrade it to MP (from OP) while downgrading STAR (unchanged TP: RM0.420) to UP (from MP) as its recent share price recovery may not be justifiable.

Results came in a mixed bag. In the latest reporting season, we saw ASTRO delivering expected results, MEDIAC exceeding expectations while MEDIA and STAR disappointed. MEDIAC’s earnings rebound was surprising given that we had anticipated trying margins in its publication segment, especially with the industry downturn. MEDIA and STAR continued to be overrun by its operating expenses as revenue streams were dragged by the lull in the adex market. ASTRO performed as expected, as its turnover faced pressures on declining paid subscriptions but earnings improved comparative to the preceding year as content cost improved, in the absence of major sporting events.

Adex will remain strained. Referencing Nielsen’s total national gross adex statistic for 3QCY19, despite the introduction of digital adex as a component (13% of 9MCY19), the overall industry appeared stagnating as digital platforms grow as alternative to the traditional media channels. However, on a quarterly basis, 3QCY19 total gross adex grew by 4% YoY. This was mainly aided by the entry of the new digital adex component, but dragged by major components such as FTA TV (-11%) and Newspapers (-14%). We do not anticipate any changes in adex trends, with digital media now a viable option for advertisers as a more cost effective and better-enabled platform in reaching the desired audiences.

Could digital tax level the playing field? Effective 1 January 2020, the country will impose a 6% tax on foreign digital service providers for services such as online advertising, digital media content (e.g. video, music streaming) and provisions for software programmes. Though the value-added tax would make these services with now widespread acceptance more expensive, we do not believe it would be significantly detrimental to the growth of digital channels in the country. Digital media content/OTT providers (i.e. Netflix, HBO Go, Spotify) may still be the cheaper alternative to consumers and an additional 6% increase (if not absorbed by the vendors) might not be a deterrent, especially with the stickiness to their products. We feel the same on digital advertising platforms (i.e. Facebook, Google) as its value proposition and potential outreach would still outweigh advertising more heavily into traditional media channels.

The struggle to be leaner, not skinnier. The long road ahead would see corporates balancing their operational needs to maintain and build presence against the diminishing relevance of traditional media platforms. Advertisers are continuing to switch from traditional media types (i.e. TV and Print) to digital platforms given the growing penetration rate in both broadband and mobile cellular segments with structural challenges becoming intense, especially with most players’ results report cards inching closer to or already in the red. One of the most notable headlines was MEDIA slashing jobs in its manpower rationalisation bid, mainly in its print segment (News Straits Times Press), to be completed by March 2020. Though we could expect significant bumps in the immediate periods from retrenchment payments, the exercise is a necessary evil in ensuring the long-term sustainability to the group. STAR’s digital roadmaps include expanding its existing platforms (i.e. Star Online, Star Property, Dimsum) and to enable crossselling opportunities, with MEDIAC also incorporating similar efforts to its brands. ASTRO took collaborative measures to expand its content pool (most recently with iQIYI) and keeping its format relevant to current viewer preferences with its new Ultra Box enabling higher definition and non-linear viewing experience. Despite all these efforts, the industry will still face fierce external competition with the internet making international contents more assessable to the picky consumer.

Maintain NEUTRAL for the sector. Overall, despite the sector’s prospects remaining vague, we stay selective as certain stocks could be more sustainable than others. In this respect, our preferred pick is ASTRO (OP, TP: RM2.00) as it continues to offer high dividend yields (>7%) and trade at undemanding valuations (1-year Fwd. PER of 10x vs. our media coverage of 20x). In this piece, we raise our TP for MEDIAC to RM0.240 (from RM0.200) but downgrade our call to Market Perform (from Outperform) with the stock being fairly priced. We raised our FY21E P/NTA to x0.6 (from x0.5) imputing greater confidence for the stock based on its recent earnings recovery. On the other hand, we downgrade STAR (TP: RM0.420) to Underperform (from Market Perform) with unchanged x0.4 FY20E PNTA. The stock has seen a price rebound which we believe could be overdone given the still bleak operational outlook of the stock.

Source: Kenanga Research - 6 Jan 2020