• The spectre of inflation and recessionary fears have taken the wind out of the media sector’s sails. Given the uncertainties and market volatility, a nimble stock-picking strategy is apt. We continue to like Astro Malaysia (Astro), as its digital pivot ring-fences the threat from streaming services, with a strong content value proposition to boast. The stock trades at inexpensive forward EV/EBITDA of <5x (-1.5SD below the historical mean) and offers industry-leading yields (>9%) supported by FCF yields exceeding 10%. Maintain sector NEUTRAL with Astro as our core pick.

• Gross/non-discounted advertising expenditure (adex) losing steam. The YoY growth in monthly gross adex has fizzled out; May showed a 2.7% contraction – the first drop since Jan 2021. We think the 9.2% YTD-5M22 gross adex growth has yet to fully capture the effects of inflationary pressure – partly bolstered by revenge spending and the Eid festivities.

• Astro’s digital pivot should mitigate pressure on subscription revenues in the medium to longer term. It will not be spared the rising interest rate environment and inflationary pressures. We note the good execution of the group’s transformation plans with the addition of more streaming video on demand (SVOD) services set to further reinforce its content value proposition. There is a growing pool of evidence that viewers are increasingly frustrated over third-party over-the-top (OTT) subscriptions, and are looking to streamline their entertainment options. The recent gazetting of the Copyright (Amendment) Act 2022 is a major milestone on the industry’s progress to rein in piracy – a positive catalyst. Both developments augur well for Astro, which has transformed from a linear pay-TV operator to a smart content aggregator.

• Media Prima’s (MPR) predisposition to economic conditions means underlying revenue/earnings are likely to be severely crimped if adex takes a turn for the worse in the ensuing months. Its gross TV adex (Nielsen) showed four consecutive months of 2-18% declines from February-May (YTD-5M22: -4.5%).

• Some correlation to polling dates, but not definitive. Our analysis on the performance of Astro and MPR in the previous two general elections (GEs) – GE13 and GE14 – suggests some discernible trends, albeit not definitive. For GE13, the highest gains for both stocks (9-17%) were realised if investors bought 3-6 months ahead of the polling day. For GE14, investors were better off accumulating the stocks near the polling day, with the highest gains notched three months thereafter.

• Stock-picking key. The sector has de-rated by c.20% from YTD highs on heightened geo-political risks and rate hike expectations. We see the challenging adex environment and structural issues keeping a tight lid on sector sentiment. Our stock calls reflect a bottom-up approach and are aligned to stock-specific catalysts. MPR trades at -1SD below its 10-year P/BV mean, which follows the 34% selldown in the past two months that we believe has priced in earnings risks to some extent. Astro trades at -1.5SD below the 10-year EV/EBITDA mean with industry-leading yields.

Source: RHB Research - 19 Jul 2022