• The road ahead for the media sector looks to be no less challenging given the uncertain impact from the Government’s subsidy rationalisation programme, inflationary pressures, and renewed geo-political concerns. The bright spot continues to be the expanding digital advertising expenditure (adex) pie. As the sector’s weak earnings prognosis has largely been priced in, a tactical stock-picking strategy is advocated. Our preferred pick is Media Prima (MPR), given its diversified adex base and exposure to the faster growing out-of-home (OOH) segment. Maintain sector NEUTRAL.

• Gross adex rose 19% YTD-February, primarily driven by the free-to-air or FTA television (+19% YoY), digital (+38% YoY), and radio segments (+24% YoY). MoM, adex fell 12% due to the shorter February month. While newspaper adex contracted further MoM, it picked up 3% YoY in February – the first positive YoY growth in 15 months. Stubbornly high inflation and the Government’s impending subsidy rationalisation exercise are key adex stumbling blocks, in our view, with negative implications on overall discretionary spending and consumer sentiment. Our mid-single-digit adex growth projection for 2024 is retained for now, supported by our house view of stronger economic momentum and the MYR gaining strength in 2H24.

• Digital adex continues to be a key driver, making up 23% of overall adex YTD. This structural shift away from conventional media is primarily driven by the change in media consumption behaviour, with the strong affinity towards social media alongside growing demand for over–the-top or OTT applications including streaming video-on-demand or SVOD services. Additionally, the ease of entry for content creators has led to the rapid growth in digital media and the democratisation of content. We expect the robust growth trajectory to continue going forward with advertisers utilising artificial intelligence or AI technology and advanced data analytics to target different customer segments and demographics.

• Another quarter to dismiss. The Feb-Mar 2024 reporting period proved to be another disappointing one, with continued earnings misses for media stocks under our coverage. Astro Malaysia’s (ASTRO) 4QFY24 (Jan) core earnings fell 17% QoQ (FY24: -41% YoY), as weaker discretionary spending led to higher subs churn. MPR’s earnings, on the other hand, were impacted by softer-than-expected adex. We cut our earnings forecasts for both companies post results, with TPs lowered. Key impediments to earnings are higher content costs from the weak MYR and sporting events (ASTRO) while MPR's growth may be capped by the subdued adex environment, extended home shopping losses, and weaker content sales. Ongoing investments in content and technology are essential to drive stronger customer engagements in light of the digital incursion. We flag the more superior growth within the OOH segment as a downside buffer to conventional adex mediums, which continue to see structural pressure.

• Key downside risks: i) Domestic and global economic headwinds, ii) a weakening MYR, and iii) negative earnings surprises. The converse represents the upside risks.

Source: RHB Securities Research - 17 Apr 2024