9MCY23 adex (-0.6% YTD) was above our expectation due to lumpy ad spend at the digital segment. YTD adex decline moderated following sequential expansion in 3QCY23 that was mainly driven by FTA television. We believe this was largely attributed to the Asian Games and state elections. Moving forward, we expect adex to normalize following the conclusion of the state polls which are held every five years. Nevertheless, we expect major festivities (i.e. Deepavali, Christmas and New Year’s Eve) to provide a seasonal uptick to 4QCY23 advertising revenues. Meanwhile, in the near term, we expect subdued advertising spend as businesses tighten their marketing budgets amidst declining sales. We raise our FY23 adex assumption to 0.5% YoY contraction (from 2.2% contraction). Maintain NEUTRAL on the sector.

Higher-than-expected boost from state elections. 9MCY23 adex of RM4.67b (-0.6% YTD) came in above our assumption of full-year adex contraction of 2.2% YTD.The deviation mainly emanates from the digital segment as sequential adex at paultan.org expanded by more than 13-fold QoQ to RM14m (2QCY23: RM1.1m). We believe this was largely attributed to marketing campaigns for Electric Vehicle Expo 2023 and hefty year-end promotions by myTukar.com. In addition, YTD adex growth of 2.3% for FTA television exceeded our assumption of a 1% contraction. Lastly, actual YTD decline of 17% for the newspaper segment surpassed our expectation of a larger 18% decrease. This was primarily due to the surge in adex from various ministries and governmental bodies during the state elections held in 12 Aug. They include Suruhanjaya Pilihan Raya, Ministry of Communications and Digital Malaysia, among others.

Narrowed YTD adex contraction. 9MFY23 YTD adex decline moderated (1HFY23: -2.4% YTD) following sequential expansion of 7% in 3QCY23 that was mainly driven by FTA television (+10% QoQ), particularly TV3 (+10% QoQ). We believe this was largely attributed to the following events: (i) Asian Games held in 23 Sept to 8 Oct, and (ii) state elections in Selangor, Kelantan, Terengganu, Negeri Sembilan, Kedah and Penang. In comparison, 2QCY23 adex merely benefitted from a single major festival (i.e. Hari Raya Aidilfitri). The above, coupled with decent expansion from the digital segment (+8% QoQ) led to the QoQ uptick in adex. This more than offset weakness at the radio segment (-12% QoQ) which received marginal election ad spend.

Newspapers still the key drag as was digital adex. Similar to the preceding quarters, the decline in YTD adex was primarily attributed to the newspaper segment (-17% YTD), largely dragged by Harian Metro (-45% YTD), Sin Chew (-27% YTD) and Star (-13% YTD). Unfortunately, digital newspaper websites were unable to capture the lost market share - as evident from youtube.com’s dominant share (80%) of digital adex in 3QCY23. Currently, the sole online newspaper portal that ranks among the top 10 digital publishers in Malaysia is thestar.com.my with 1% share of total digital adex. On the other hand, digital media sustained its steady market share expansion to 22.1% (2QCY23: 22%, 2QCY22: 21.5%) in 3QCY23.

Adex outlook remains gloomy. Moving forward, we expect normalization of adex spend following the conclusion of the state polls that are held every five years. Nevertheless, we expect major festivities (i.e. Deepavali, Christmas and New Year’s Eve) to provide a seasonal uptick to 4QCY23 advertising revenues. Against this backdrop, we expect muted overall advertising spend in the near term as businesses tighten their marketing budgets amidst declining sales. This corresponds with the drop in the Malaysian Institute of Economic Research’s (MIER) Business Conditions Index to 82.4 in 2QCY23. This translates to its lowest level since 2QCY20 following a sequential 13-point dip. Meanwhile, MIER’s Consumer Sentiment Index contracted by 8.4 points to 90.8 in 2QCY23 which is far below its 100-points optimism threshold.

Neutral due to subdued earnings prospects. We raise our FY23 adex assumption to 0.5% YoY contraction (from 2.2% contraction) to reflect higher ad spend at the FTA TV and newspapers segments. We maintain our NEUTRAL stance on the sector given that media companies now have a leaner cost structure following restructuring and cost optimization initiatives in recent years. Furthermore, except for ASTRO, media players under our coverage are in net cash position - which provides a war chest for earnings diversification. However, we remain cautious due to weak adex spend, the cord cutting trend and sustained marginalisation of newspapers. Our top pick for the sector is STAR given its: (i) proactive plans to future proof its earnings via a 5-year transformation journey, (ii) strong balance sheet with sizeable cash coffers, and (iii) traction in efforts to transition to digital media.

Source: Kenanga Research - 19 Oct 2023