We maintain our UNDERWEIGHT call on the media sector. The MCO proved to be detrimental to the sector, as expected. Though we had earlier anticipated for the worst to pass, the advertising industry could still be deep in a lull as advertisers contend with a less vibrant economy, more digital options and lingering caution on the possible re-imposition of tighter movement restrictions. There were grounds gained in the e-commerce/home-shopping space, which we believe corporates will continue to leverage on, particularly with a larger home-bound population. To provide more value propositions, media players have moved to introduce integrated advertising solutions to better serve the needs of advertisers while optimising the effectiveness of advertising spends. Overall, the softness of near-term expectations and sentiment could deflate valuations. For those who have to stay invested, we favour ASTRO (OP; TP: RM0.830) as our preferred pick, mainly for its stellar dividend yield potential of c.7% and subscription-based model which might cushion the volatility of fickle consumer spending towards earnings.

A most hurtful 2QCY20. The last reporting quarter saw media players suffering the full brunt of the MCO which put a halt in business activities and limiting consumer movement for only bare essentials. Even with the relaxation of movement restrictions, the economy has yet to be fully restored. This led to advertisers plunging to losses, though this has been mostly expected. STAR was the only miss as it registered deeper-than-expected losses as we had underestimated the impact of the MCO on its nationwide leading brand. ASTRO saw a tougher 1QFY21 (ending Apr) as customer acquisition efforts and installation works had to be put on hold but it was able to regain some ground with the reopening of overall activities, as reported in its 2QFY21 results (ending Jul).

Longing for better times. In spite of the pains felt in 2QCY20, we do not expect the industry to register significant improvements in adex in 3QCY20. This is warranted by: (i) more cautious corporate appetite in the midst of softer overall consumer spending; (ii) slower foot traffic from ongoing movement controls (albeit more relaxed in comparison to 2QCY20); (iii) greater digital adoption which was accelerated by more home-bound arrangements; and (iv) fears of another Covid-19 wave and reimposition of movement controls. Adding to this, the lifting of Bank Negara’s bank loan moratorium could knock another dent on consumer spending when income concern is already a prevalent issue. Quoting Nielsen’s most recent statistics on total gross adex, 1HCY20 numbers were 20% lower YoY while 2QCY20 was 32% sequentially weaker than 1QCY20.

Leveraging on what works. At the opposite end of diminishing advertising revenues, corporates involved in the e-commerce/homeshopping space are enjoying better performance thanks to the same abovementioned greater digital adoption. We anticipate for this trend to sustain in the medium term as consumers whom were previously unexposed to the convenience of online shopping progressively adopt more tech-savvy habits. Riding this wave, we also anticipate corporates to make more proactive steps in enhancing user experience while introducing more offerings to make their respective platforms more relevant. That said, it is also unlikely that this segment could overwhelm the bread and butter advertising segment. Acknowledging the greater need for value-for-money solutions, integrated advertising services (Omnia from Media Prima, data analytics from Star) aim to provide greater value propositions to prospective advertisers to capture as wide an outreach as possible.

Maintain sector weighting at UNDERWEIGHT. Investors are likely to remain highly selective in this space as the risk-to-reward ratio appears to be unfavourably skewed owing to the uncertainties surrounding the Covid-19 pandemic and its socio-economic effects. ASTRO (OP; TP: RM0.830) continues to be the preferred pick for the sector on the back of its high dividend yield (+7%) and more resilient subscription-based model as opposed to other advertising-dependent players. That said, investors might remain cautious from a glut of content cost which might surface in FY22/FY23 owing to the postponement of major sporting events to those years. Though we leave our TPs within our coverages unchanged, we downgrade MEDIAC (TP: RM0.145) to UNDERPERFORM (from MARKET PERFORM) as we recommend investors to take profit amidst the stock’s additional exposed risks on further overseas travelling restrictions affecting their travel and travel related services segment.

Source: Kenanga Research - 7 Oct 2020