Kenanga Research & Investment

Media U - Adex Rout Weighs on 4QCY23 Results

Publish date: Tue, 05 Mar 2024, 10:17 AM

4QCY23 results came in mostly below our full year forecasts (3 out of 4) due to weak adex, lower subscription revenues, and high overheads. YoY weakness in 4QCY23 adex was prevalent for media companies under our coverage. Additionally, pay-TV subscription revenues sustained its quarterly rout amidst subscriber churn. We maintain our UNDERWEIGHT stance as we wait for traditional media players to adapt and compete effectively within the new landscape that is dominated by digital media. We do not have any stock picks for the sector.

Largely underwhelmed. The 4QCY23 reporting season came in mostly below our full-year forecasts (3 out of 4). On the bright side, this translates to a slight sequential improvement versus 3QCY23, where all four companies disappointed. The sole outperformer that exceeded our expectations in 4QCY23 was MEDIAC (UP; TP: RM0.11) as it harvested the fruits of its cost cutting initiatives in 3QFY24. Meanwhile, the three companies that disappointed were dragged by the combination of weak adex, lower subscription revenues, and high overheads.

Disappointing adex and Pay-TV subscriptions. YoY weakness in 4QCY23 adex was prevalent for media companies under our coverage, including ASTRO (UP; TP: RM0.33) (-11%), MEDIA (UP; TP: RM34) (-8%), and MEDIAC (-16%). Whilst STAR (UP; TP: RM0.314) does not disclose its adex numbers, Nielson revealed that adex for The Star newspaper declined by 21% YoY in 4QCY23. On the other hand, according to Nielson, total adex for the industry (excluding digital media and pay TV) was flattish in 4QCY23. We believe the variance may largely be attributed to MEDIA, given larger declines in adex for its radio channels vis-à-vis the broader industry. Meanwhile, for pay TV, subscription revenues for ASTRO declined by 6% YoY in 4QCY23/3QFY24 as subscriber churn prevailed (YoY: -2.5%). This translates to sustained contraction in quarterly subscription sales since 2QFY22 (except for a blip in 4QFY23 due to World Cup season).

As a result of the above, and coupled with cost pressures, media players within our coverage universe reported weaker earnings. The sole exception was MEDIAC as it reported narrowed losses given effective cost optimization initiatives. Meanwhile, STAR slipped into the red with 4QCY23 core net loss of RM960k (3QCY23: RM300k profit) as its traditional media businesses turned loss-making.

Earnings weakness will likely prevail. We believe it is challenging for traditional media (i.e. TV, radio and newspapers) to regain adex share lost to contemporary media. This reflects the structural trend where interest is shifting into: (i) streaming apps or websites (eg.Youtube, Spotify, Apple Music), (ii) mobile apps (e.g. Waze, Grab, CamScanner), and (iii) social media platforms (e.g. celebrity influencers, Instagram, TikTok, Facebook, X). Evidently, over the past three years, digital media’s adex share has progressively inched up from 15.7% in 4QCY20 to 23.5% in 4QCY23. Whilst this had led to topline contraction for traditional media entities, the corresponding reduction to their fixed cost base have been comparatively slower. As such, this lag in cost adjustment has culminated in a more pronounced and steeper decline in bottomline.

Moreover, we believe that competition with new media remains intense due to: (i) proliferation of digital content creators given low barriers of entry, (ii) structural shift in interest to short video formats and livestream sales on digital platforms, and (iii) application of artificial intelligence (AI) technology in digital media that curates personalized content and commercials. Therefore, for local media companies, their market niche will likely be limited to audiences that seek high quality local vernacular content.

Muted adex outlook. Moving forward, for CY24, we expect relatively subdued adex given the lack of key catalyst events. This is because except for the biennial Thomas Cup tournament and Winter Olympics, there are no major upcoming local elections or global sports events (e.g. Summer Olympics, World Cup). In comparison, FY23 was uplifted by state elections, SEA Games and Asian Games. Furthermore, implementation of new taxes in CY24 will weigh on consumer discretionary spending. They consist of: (i) luxury taxes (5%-10% on certain goods valued above RM10k), and (ii) higher sales and service tax rate of 8% on qualified transactions (from 6%). On the back of this, we maintain our assumption of a slight 0.3% YoY contraction in CY24 total adex. However, in-line with digital media’s dominance and growth trajectory, we expect CY24 total adex (ex digital) to contract by a greater 1.8% YoY.

We maintain UNDERWEIGHT on the sector as we wait for traditional media companies to execute strategies that enable them to compete in the new industry landscape dominated by digital media. This may be effected via measures such as diversification to new businesses, further cost base optimization, reinvention of their business model. We do not have any stock picks for the sector.

Source: Kenanga Research - 5 Mar 2024

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