• A slow grind. The media sector’s growth prospects remain challenging due to structural concerns, geopolitical uncertainties and domestic policy headwinds. There are downside risks to advertising (ad) spending, due to the lingering effects of diesel subsidy rationalisation, which continues to dampen sentiment. With the weak earnings prognosis priced in, we continue to advocate a tactical trading strategy focusing on stocks with positive news flow. We remain NEUTRAL on the sector.

• Share prices of media stocks under our coverage have fallen by about 13% YTD on weak corporate earnings and sluggish advertising expenditure (adex). Aggregate core sector earnings plunged by 40% QoQ (-45% YoY) in 1Q24, with some seasonal elements at play, partially mitigated by cost efforts.

• Gross adex down for two consecutive quarters in June. While industry adex rose by 5% in YTD-June (Figure 2), it has contracted for two quarters in a row. Specifically, we note that digital adex plunged 26% YoY in 2Q24 (June: -45% YoY) with its contribution to adex narrowing to 16%, compared with 21% in 1Q24. We see downside risks to adex, due to the lingering effects of the diesel subsidy rationalisation which should continue to dampen sentiment in 2H24. We keep our mid-single-digit adex growth projection for 2024 (2023: +2% YoY)for now, helped in part by various sporting events including the Paris 2024 Olympics.

• Sector earnings momentum to remain lacklustre; cost in focus. We see the subdued sector earnings momentum persisting on the back of tighter consumer purse strings and the cautious external environment(geopolitics and macroeconomic headwinds). Cost optimisation should remain a key narrative for media players. Astro Malaysia (Astro) previously disclosed a one-third cost reduction from the revamp of its customer support system, with further digitalisation of processes expected to contribute to additional opex savings in the longer term. We note it is also shifting its playout service to the cloud,which would see the removal of costs associated with maintaining legacy systems. Astro stands to also save MYR10-15m per quarter in opex, depreciation and interest cost from the decommissioning of six transponders on MEASAT-3A which reaches its end-of-life in July.

• Astro slapped with additional MYR735m tax claims. On 11 Jul, Astro was served with additional tax claims from the Inland Revenue Board (IRB) for the 2019-2023 years of assessment, including penalties. The additional charge pertains to local content production costs that were previously allowed for tax deduction but are now disputed by the IRB. Management sees good grounds for an appeal, and aims to challenge the validity of the claims. The amount translates into c. 50% of Astro’s market cap. Based on similar notices filed by the IRB in the past on other corporates, the legal process looks to be protracted. We do not rule out an “amicable settlement” in due course, as the group seeks to resolve the issue expeditiously.

• Key sector/stock risks: i) Domestic and global economic headwinds/tailwinds, ii) weaker/stronger MYR, and iii) negative/positive earnings surprises.

Source: RHB Securities Research - 26 Jul 2024