The  FIFA  World  Cup  2014  may  give  a  boost  to  Malaysia’s  adex  and media counters (notably in the TV space), as it has in the past. Our 2014 overall  adex  growth  estimate  of  8%  is  conservative  (vs  15.6%  during World Cup 2010), owing to tighter adex spending by advertisers. MPR is still our Top Pick,  while  Astro  is now a NEUTRAL  –  which leads us to downgrade the sector to NEUTRAL from Overweight.

• Football  fever  good  for  adex.  Historical  data  suggests  that  gross advertising expenditure (adex)  typically  rises  during the  FIFA World Cup year,  as  the sport’s large fan  base creates  opportunities for advertisers to hold more marketing campaigns, especially on TV.  Gross adex (exPay  TV)  climbed  15.6%  y-o-y  during  World  Cup  2010,  with  free-to-air (FTA) TV  chalking up  the strongest growth at 18.2% y-o-y, followed by newspapers  (+14.1% y-o-y). We expect  total gross adex to  go up by  8% for 2014,  slower than the  15.6%  growth  it achieved in  2010. We believe that the slower growth will be attributed to: i) household spending cuts in view  of  the  Government’s  gradual  removal  of  subsidies,  ii)  tighter advertising  spending,  and  iii)  clients  shifting  their  focus  to   online advertising given the growth of online social media.
• TV  players’  earnings  to  rise.  With  the  2014  World  Cup  set  to  drive adex growth, media players (especially in the TV segment) expect to see a  rise  in  their  revenue  and  earnings  this  year.  An  indicator  of  this  is Media Prima  (MPR MK, BUY, FV: MYR3.60),  which saw its TV segment revenue  surge  34% and 19% respectively in 2006 and 2010  (when the World  Cup  was  held),  which  translated  into  PBT  growth  of  64%  and 118%  over  the  same  period.  Astro  (ASTRO  MK,  NEUTRAL,  FV: MYR3.36)’s revenue and PBT growth followed a similar path, growing by 17% and 27% respectively in 2006.
• MPR is our Top Pick. We see Media Prima as the major beneficiary  of the World Cup and expect it to capture  higher adex growth in 2014 since TV  is  its  main  profit  contributor.  On  the  back  of  a  forecast  revenue growth of 9%, we expect MPR to  post earnings growth of 16% this year, boosted  by  expanding  margins  and  narrowing  losses  at  its  content creation division.
• Downgrade  to  NEUTRAL.  We  downgrade  the  media  sector  to NEUTRAL  following  the  downgrade  on  ASTRO  given  its  recent  share price strength. While the World Cup is expected be positive for  adex, we think the 8% growth projected for 2014 is nothing  to shout about, mainly owing  to:  i)  household  spending  cuts,  ii)  tighter  adex  allocation  by businesses  and  the  Government,  and  iii)  the  shift  towards  online advertising. Within the sector,  we prefer companies with  exposure to TV advertising  as they  stand to  benefit most from the World Cup. As such, MPR is our Top Pick for the media sector.

Malaysia’s Media Sector – Strategy 2014
World Cup heralds adex growth. The FIFA 2014 World Cup is scheduled to be held in Brazil on 12 June-13 July 2014. Historical data shows that gross adex usually goes up during the year the FIFA World Cup Year is held due to the large fan, which gives rise to  opportunities for  advertisers to  mount more marketing campaigns,  especially on TV. Based on data we gathered, gross adex (ex-Pay TV) rose 15.6% y-o-y during the World Cup 2010,  with free to air (FTA) TV  adex growing at the fastest -  at 18.2% y-o-y  -  followed  by  newspapers’  14.1%  y-o-y.  (Note  that  adex  from  point  of  sales surged 44.8% y-o-y, mainly due to a very low base).

Expecting 8% y-o-y growth.  We expect overall  gross adex to  rise by  8%  in  2014, which  is  1.48x  of  our  projected  2014  GDP  growth  of  5.4%.  This  is  conservative compared to  the  2010  (the previous  World Cup year),  which saw adex growing  by 15.6%,  or  2.2x  of  the  GDP  growth  of  7.2%.  The  slower  growth  is  attributed  to:  i)household  spending  cuts  in  view  of  the  gradual  removal  of  subsidies,  ii)  tighter advertising spending,  and  iii)  the shifting trend towards  the  online  advertising given the  rise  of  the  social  media  platform.  However,  since  the  election  year  -  which contributed to uncertainties in planning advertising campaigns last year – is over, this will be positive for businesses to plan and budget their advertising campaigns more efficiently.

TV to see  the strongest growth in 2014.  Adex for the TV segment  –  for  which we expect to see the strongest growth  –  will increase by  8.9% in  2014,  mostly driven by heightened  advertising  during  the  World  Cup,  new  TV  channels  (notably  in  high definition) and new TV programmes. This bodes well for MPR  and ASTRO, for which we expect EBITDA to go up  12% and 7% this year  on the back of a revenue growth of 7.6% and 9.2% respectively.

Boost to TV players’ earnings.  The 2014 World Cup is  expected to give a boost to this year’s  adex,  which will  bode well for  the media sector’s  revenue and earnings growth, especially the TV segment. An indicator of this is the revenue growth chalked up by  Media Prima (MPR MK, BUY, FV: MYR3.60)’s TV segment of  34% and 19% respectively in 2006 and 2010,  which translated  into PBT growth of 64% and 118% over the same period.  Astro  (ASTRO MK, NEUTRAL, FV: MYR3.36)’s revenue and PBT growth also grew, rising 17% and 27% respectively in 2006.

Newsprint cost  should be flattish. We expect the newsprint prices to be flattish,  at USD595-605  per  tonne  in  2014  (vs  USD600-610  per  tonne  last  year),  as  global demand for newsprint has waned due to the shift to online media. Media players with exposure  to  print  such  as  MPR  and  Media  Chinese  International  (MCIL  MK, NEUTRAL, FV: MYR1.06) will see their margins expand, as a result.

MPR is our Top Pick.  We see Media Prima  –  being the country’s only integrated media player -  as the major beneficiary  of higher adex growth in 2014,  driven by the World Cup, as TV is biggest profit contributor given its  high margin, which happens to also be higher than Astro’s due to its cheaper content cost.  We also see its revenue from  digital  media  and  content  production  growing.  This,  coupled  with  flattish newsprint cost, offers scope for overall margins to improve. On the back of a revenue growth forecast of 9%, we expect MPR to post double-digit earnings growth of 16% from wider margins as well as narrower losses from its content creation division.

MPR offers >5% dividend  yield.  MPR is generous in paying decent  dividends  to  its shareholders.  In  FY12,  it  has  paid  off  its  accumulated  losses  and  began  reporting positive  retained earnings,  which may have put it in a more comfortable position to pay  higher  dividends  to  investors  (capped  at  75%).  As  MPR’s  management  is reviewing its dividend  payout policy,  there is a  possibility of  higher dividends  moving forward.  MPR is a quality stock to own for its decent dividend yield  of  5.4-6.2% and earnings  growth potential.  We maintain  a  BUY on MPR,  with our  FV  unchanged at MYR3.60 based on 15x FY14F P/E,  based on  +1 SD from the mean of its historical trading band.

ASTRO  is  a  longer-term  investment.  We  continue  to  believe  that  ASTRO  is  a longer-term investment, since it is currently reinvesting heavily  in order  to  remain as the Pay TV market leader.  Over the years, it has  successfully  maintained its  position as the largest Pay TV operator through its strategy of providing  quality content  and a superior  viewing  experience  for  subscribers.  These  were  accomplished  through investments  that  required  heavy  capex.  We  believe  this  will  elevate  its  average revenue  per  user  (ARPU)  and  help  maintain  its  market  leadership  -  which consequently will translate to improved profitability. Our DCF-based FV for ASTRO isat  MYR3.36, based on  a  WACC  of  8.45%, and terminal growth rate of 1.5%.  With less than a 10% upside, we downgrade Astro from Buy to NEUTRAL.

MCIL still lacks  strong growth catalysts.  MCIL has the single largest exposure to print media. The medium is now facing challenges from e-substitution and advertisers switching  to  the  FTA,  which commands  a  larger  audience  base.  Although  Chinese newspapers  are  among  the  best  performers  in  attracting  gross  adex  compared  to other  languages,  the  trend  may  not  sustain  for  long  -  since  digital  papers  would become  more  common  as  more  sophisticated  technology  and  better  internet infrastructure  is developed. The accessibility to  information  online has  also  changed the landscape of the newsprint segment. Additionally,  MCIL’s overseas businesses in North America and Hong Kong  are facing  an earnings decline due to  competition  in the  region,  where  online  penetration  for  advertisements  is  much  higher.  As  such, MCIL’s earnings  outlook is  bleak; we project its net profit to  decline by 17%  in FY14.

Nonetheless,  we  believe  its  strong  presence  in  the  Chinese  community  would continue to keep its cash flow  healthy, at least enabling the company to maintain its 50%  dividend  payout  policy,  which  would  translate  to  a  5.3%  forecasted  dividend yield.  Since it lacks  positive  earnings  catalysts,  we  remain  NEUTRAL  on the stock, with  no  change  to  our  FV  of  MYR1.06.  Our  FV  is  premised  on  11.6x  CY14F  P/E, which is the mean of its 5-year historical trading band.

CHM’s  value  underlies  on  its  associate  in  Australia.  We  think  Catcha  Media(CHM  MK, BUY, FV: MYR0.96)  is an undervalued  stock.  Interestingly,  CHM’s  29% stake in iCar (ICQ AU, NR), based on its market cap, has exceeded its market cap by 46%.  Essentially,  CHM  investors  would  own  ICQ  shares  at  a  discount  on  top  of owning  CHM’s  operations  for  free.  Although  CHM  is  still  reporting  losses  owing  to ICQ being in its early growth stage, we expect earnings from the company to improve further  after the acquisition of Says.com, which is  a  profitable  online content-sharing company.  We  are  maintaining  our  BUY  recommendation  for  CHM,  with  an unchanged FV of MYR0.96, based on a SOP valuation.

Downgrade sector to NEUTRAL. With two BUY and NEUTRAL calls each following the  downgrade  of  ASTRO  today,  we  downgrade  the  media  sector  to  NEUTRAL. While the 2014  World Cup is expected be adex-positive, we think the  expected 8% growth for this year  is nothing to  shout about  owing to  household spending cuts and tighter  adex  allocations  by  businesses  and  the  Government,  coupled  with  the  shift towards  online advertising.  Within the sector, we prefer companies with exposure to the TV medium, as these will benefit most from advertising relating to the 2014 World Cup. This justifies MPR as our Top Pick for the sector.

Source: RHB