We maintain our recently upgraded OVERWEIGHT call (from NEUTRAL) on the media sector. For the past few quarters, the sector was bogged down by declining revenue prospects amidst the ongoing digitalisation of advertising medias dampening the demand for traditional media channels (i.e. television, physical print publications). We do not discount that the Covid-19 pandemic and slowing global economic activity could dampen sentiment further. Concurrently, overhead costs could surpass dwindling top-lines for most players. That being said, we believe that media players have finally found the sweet spot in managing operating expenses through painful restructuring exercises (i.e. manpower rationalisation) while growing their presence in digital spaces and expanding on their integrated marketing solution offerings. We have mostly trimmed our earnings assumptions and valuations with this piece and are still convinced of the value to be had within this industry. MEDIAC (OP; TP: RM0.245) is our preferred pick for the sector, having its near-term earnings guarded by recent tax incentives while paying handsome dividend yields of c.9%.

Better mix in 4QCY19. During the last reporting season, we saw two surprisingly better-than expected performances from MEDIA and MEDIAC. On the flipside, STAR’s financial results came in line with expectations. Though MEDIA stayed in losses during the year, it ended its 4Q on a strong note thanks to its restructuring exercises that included trimming its staff costs in the publishing and radio division which is seen translating to better subsequent quarters. MEDIAC performed much stronger than we had anticipated, largely due to our overly pessimistic view on the situation in Hong Kong. ASTRO’s recent 4Q20 results missed our mark as we were too bullish with our subscriber estimates.

The going gets tougher. Based on Nielsen’s CY19 findings on total gross adex, total value registered at RM5.94b (+2% YoY). The growth was thanks to newly introduced digital adex contributing RM781.4m to the yearly value. Excluding this portion, the industry was at a 12% decline. The shift from traditional media to digital outlets could be attributed by the more interactive and engaging nature of the latter, which could also be argued as the more efficient means for present-day marketing and advertising. Key platforms unsurprisingly contribute most of the decline, with free-to-air television (FTA TV) and newspapers losing 11% and 17% YoY in their respective gross adex. Cinema (+13%) was the outlier, having benefited from many successful film releases in 2019, albeit being a small proportion to the industry. With the ongoing Covid- 19 pandemic, personal consumption would take a hit, especially with the recent movement control order enforced and extended. This may further hit the demand for newsprints in favour of more accessible digital mediums. With business activity looking to slow down from a softening global economic environment, advertisers may further trim marketing expenses. Media platforms could also be adversely affected if mid-year major sporting events are cancelled or postponed (i.e. Tokyo Olympics).

Measures against the storm. Recent organisational restructuring exercises by media leaders could not have been more timely in the face of challenging market headwinds. Most of them are focused mainly on traditional print and publishing segments which saw the largest decline in relevance. With digitalisation a growing means of broadening business strategies, media players are implementing focused marketing to ensure that content reaches the most relevant consumers. In addition, we start to see advertisers offering integrated media solutions for customers to better achieve their marketing objectives. As for video providers, ASTRO looks to continue expanding its content by forging new partnerships in the future. However, Covid-19 may hamper any such plans in anticipation of a general slowdown of consumer spending and poorer customer acquisition results. Meanwhile, the group aims to keep costs low and cash liquid, evident by the recent full-year dividend payout which was below its 75% minimum policy.

We maintain OVERWEIGHT on the Media sector. We had previously upgraded the sector in our 4QCY19 Results Review Strategy piece. After revisiting our earnings assumptions and valuations in consideration of the greater challenges above, we continue to maintain our rating of the sector (refer to the overleaf for adjustments made to our earnings and calls). Even as we stress our applied valuations, stocks in coverage continue to demonstrate valuations that could set them up for corrections, mostly being below their respective 3-year Standard Deviation (SD) averages. Amongst the coverage, we prefer MEDIAC (OP; TP: RM0.245) for its strong dividend yields of c.9%. While it may see earnings risks from both its publishing and tourism fronts, we believe we have well-factored this into our updates. The stock is buffered by its most recent tax incentive awards, which translate to FY21E/FY22E earnings of RM42.4m/RM34.8m (+54%/-18%). Additionally, its net cash per share of c.16 sen/share could be a comforting cushion for investors.

Source: Kenanga Research - 1 Apr 2020