2QCY20 gross adex numbers by Nielsen reflected the heavy damage dealt to the adex market and businesses by the Covid-19 induced MCO. Both traditional and digital channels were affected, with physical media distribution and outdoor activity frozen from 18 March to 9 June. With the closure of some businesses, loss of income became a nagging concern with consumer spending taking a step back. We believe economic recovery could be a medium-term endeavour with our current in-house GDP CY20 forecast at -5.9%. For the time being, corporates are keeping a watchful eye to constantly streamline costs while banking on integrated advertising solutions to best cater to the needs of their respective markets. We maintain UNDERWEIGHT on the sector and maintain our UP call for MEDIA (TP: RM0.105), MEDIAC (TP: RM0.145) and STAR (TP: RM0.300). We upgrade ASTRO (TP: RM0.830) to OP (from MP) as it is oversold at currently and also offers attractive dividend prospects (c.8% yield).

In a downturn, everyone is affected. Based on Nielsen’s 6MCY20 statistics, total gross adex came at RM2.29b which is 20% lower YoY. Stripping off digital contributions, traditional media platforms diminished by 28%. Though the ever-growing digitalisation is faulted for the lower usage of conventional channels for advertising needs, 2QCY20 was especially affected by the chokehold on business activity and consumer spending from movement control orders (MCO) and lockdowns amidst the Covid-19 pandemic. During this time, physical prints and distribution were disrupted as consumers were home bounded and several businesses stopped operations (i.e. retail outlets, cinemas) until mid-June. The economic standstill also meant that businesses became more cautious of their advertising expenditures as consumers juggled with the possibility of loss of income. On a YoY basis, newspaper adex fell by 44% and radio adex by 35%. Television adex only declined by 10%, likely supported by higher viewership from home bound consumers.

QoQ, 2QCY20 total gross adex fell by 32%, due to the abovementioned reasons. With the lockdowns in place, cinemas were effectively nonoperational during the quarter and hence recorded zero adex revenue. Even the up and coming digital adex platforms bummed down by 29% on the same reason of weaker economic and business activities and consumption by consumers. Notably, the traditional newspaper channel reported a 53% plunge in its quarterly adex as publishers had to work around lesser content to pair with the fewer advertising spaces. Radio adex was also hit badly with a 58% drop in adex.

(Due to complications stirred by the MCO, Nielsen represented that certain print channels (albeit non-market leaders) were unable to provide adex readings and data for them to derive a like comparison against previous quarters. That said, we believe the current data paints a plausible and sufficient picture of the current advertising landscape supported by our industry checks and anecdotal evidence).

Outlook. Though the national economy has slowly regained its footing with loosening of movement controls, the blow dealt from the MCO will likely take some time to mend. Business closures and less vibrant outdoor foot traffic could continue to impede advertising and marketing spends. With the loss of income already affecting certain segments and the looming lifting of Bank Negara’s bank moratorium along the way, spending has taken a soft turn downwards and could remain so to say the least. In the meantime, fears of a second pandemic wave could put the market on the edge especially if another MCO were to be enforced, with consumers preserving cash for now, particularly for discretionary goods. Internally, Kenanga Research has a GDP growth forecast for CY20 at -5.9%.

Maintain UNDERWEIGHT on the Media Sector. We believe the present trying times will continue to pressure media players, with cost and staff rationalisation being commonplace to sustain profitability and cashflows until conditions improve. We also see most advertisers offering integrated advertising platforms and data analytics to sell a wider consumer outreach while also boasting a greater presence in the digital space. That said, only time will tell if these efforts could sufficiently soften current challenges. We have unchanged UNDERPERFORM calls for MEDIA (TP: RM0.105), MEDIAC (TP: RM0.145) and STAR (TP: RM0.300). That said, we take this opportunity to upgrade ASTRO (TP: RM0.830) to OUTPERFORM (from MARKET PERFORM) as it offers attractive dividend potential (8%) at current price points. YTD, we have revised down our FY21E earnings by 22% which we believe has sufficiently accounted for potential loss of subscriptions and ARPU from the effects of Covid-19. Our TP for ASTRO is based on a 9.0x FY22E PER valuation, which is 1.5 SD below the stock’s 5-year average.

Source: Kenanga Research - 25 Aug 2020