1QCY20 gross adex numbers by Nielsen painted an overall decline from non-digital streams (-9%), though television sub-segment was boosted by new DTT inclusions. It is likely that the decline in traditional channels have not bottomed, with the MCO likely to accelerate the shift to digital media from traditional prints. That said, we believe free-to-air TV (FTA TV) could see some gains with most of the population being homebound. This could have been even stronger had the mid-year sporting events (Euro 2020, Tokyo Olympics) not been postponed. Listed players have begun moving into the digital space, with the likes of STAR introducing a paywall for its online platform and MEDIA looking to offer integrated solutions and services for its customers. Post-update, we downgrade our call for MEDIA (TP: RM0.140) to MARKET PERFORM (from OUTPERFORM), having recovered well sinceitsselldown. Our other calls remain unchanged. MEDIAC (OP; TP: RM0.245) remains to be our top pick for the sector, with: (i) its shielded earnings from cost savings amidst top line pressures, (ii) solid dividend yield of 7-8%, and (iii) strong net cash per share of c.16.0 sen. Maintain OVERWEIGHT for the sector given the majority of our calls remaining as OUTPERFORMs.

Internet advertising thriving. Based on Nielsen’s 3MCY20 statistics, total gross adex registered at RM1.34b, flattish from 3MCY19. However, this was sustained by the 56% YoY growth in digital adex. Removing this, traditional media platforms dipped by 9%, with the biggest loser being newspapers (- 24%). Recall that Utusan Malaysia and Kosmo! shut their doors in 4QCY19, unable to bear the strain of declining print sales, contributing to the stark overall decline. While the key component of FTA TV saw a rise of 5% in adex value, this was due to Nielsen now tracking digital terrestrial television (DTT) channels from 3MCY20. Removing this, FTA TV actually declined by 1% YoY. Other notable declines are Cinema (-25% YoY) which previously saw strong results, thanks to blockbuster films in 2019.

QoQ, 1QCY20 total gross adex diminished by 17% against 4QCY19, which could be due to greater seasonal demand during the year-end periods. Similarly, digital adex continued to be gaining traction (+27%) at the expense of its conventional counterparts likely due to more engaging and effective means of reaching target audiences.

Outlook. With the ongoing movement control order (MCO) stemming from the Covid-19 pandemic, it is highly probable that traditional platforms would be affected more. Newspaper publications may not physically reach readers as easily, while Out-of-Home advertising is proving to be less relevant as traffic flow greatly dwindles during the MCO. With almost the entire population being homebound, television and digital channels will see even greater consumption as a source of entertainment and news updates. However, the postponement of international events, such as Euro 2020 and Tokyo Olympics, would eliminate the otherwise seasonally induced traction that video platforms could benefit from. That said, online and web subscription for news access could see strong reception during this period, such as STAR’s recent implementation of a paywall for Star Online. MEDIA, having a fair share in television advertising, may also seek to push its integrated solutions offerings in a time where advertisers are cautious about spending on marketing. Fundamentally, the group’s past downsizing of its print segment appears timely given the current circumstances. While these efforts may take time to gain meaningful traction, tight cost controls are crucial to keep profits sustainable amidst the weakness in traditional channels, of which we see MEDIAC as the best candidate for such a scenario.

Maintain OVERWEIGHT on the Media Sector. Despite the hurdles ahead, media players are still showing resilience in keeping up with their respective strategy to stay ahead. We continue to believe our valuations are undemanding, as most applied valuations are below the 3-year standard deviations of the respective stocks. Though we leave our target prices unchanged, we downgrade MEDIA to Market Perform, having recovered from its recent sell-down. While ASTRO (OP; TP: RM0.900) commands dividend yields of 11%, it could be at risk should management choose to adopt more cautious payouts for cash flows management. Our Top Pick for the sector is MEDIAC, as we believe its short-to-medium term prospects are well buoyed by its leaner cost structure and tax incentive wins. On top of a 7% dividend prospect, the company holds net cash per share of c.16.0 sen, against its last closing price of 20.5 sen.

Source: Kenanga Research - 27 Apr 2020