Review of 1Q24

The media sector has exhibited signs of recovery in adex revenue since the start of 2024. According to Nielsen Media Research, traditional media adex in 1QCY24 rose 12.2% YoY to RM1,325mn. This growth was primarily driven by two key mediums: free-to-air television (+16.7% YoY) and radio (+17.5% YoY), which accounted for 72.5% and 8.34% of traditional media adex, respectively.

Despite the recovery seen in adex, all companies under our media universe have YTD underperformed vs. the KLCI (+9.3%). This was led by STAR (- 7.2%), ASTRO (-7.1%) and followed by MEDIA PRIMA (+1.3%).

This underperformance can be attributed to a challenging business environment, rising inflationary pressures and ongoing geopolitical issues, thus leading to several significant advertisers reducing adex spending. Additionally, rising operating costs have further pressured profitability.

Going into 2H24, we highlight 3 major factors potentially influencing the media sector’s earnings and share price performance:

1. Business & Consumer Sentiment

2. Boycotts Challenge Adex Major Spenders

3. Continuous Strong Competition From Foreign Tech Giants

1. Business & Consumer Sentiment

The Malaysian Institute of Economic Research's (MIER) latest report for 1QCY24 paints a cautious picture for the media sector. The Business Conditions Index (BCI) declined to 94.3 points, down 1.1 points YoY, indicating subdued business investments and potential reductions in advertising spending. This trend suggests that businesses may tighten their advertising budgets, posing challenges for traditional media outlets heavily dependent on ad revenues. Concurrently, the Consumer Sentiment Index (CSI) dropped to 87.1 points, a significant decrease of 12.1 points YoY, reflecting heightened consumer caution in spending. This could lead to decreased consumer expenditure on media subscriptions and other nonessential media services, impacting revenue streams that rely on discretionary spending.

Moreover, persistent inflation concerns further exacerbate consumer uncertainty, influencing media consumption patterns and spending behaviours. The declining BCI and CSI highlight a cautious economic environment that presents significant challenges for the media sector in Malaysia.

2. Boycotts Challenge Adex Major Spenders

Several global brands have been accused of taking a controversial stance in the Israel-Gaza conflict, triggering widespread consumer boycotts. These boycotts are primarily driven by consumer activism, where customers are increasingly holding brands accountable for their perceived political alignments. The backlash has compelled brands to withdraw or scale back their advertising campaigns to avoid further negative publicity.

The boycotts and the ensuing negative sentiment have not only affected the brands but also major advertisers. The geopolitical instability has created a challenging business environment, forcing advertisers to adopt a cautious approach to spending. They are now reallocating resources to crisis management and public relations efforts, a move that further reduces their advertising spend.

The reduction in advertising expenditure has direct financial implications for media companies. Advertising revenue, a substantial part of their income, has sharply declined. Media companies are facing decreased demand for ad slots, leading to lower occupancy rates and reduced pricing power. This trend is evident across various media segments, including television, digital, and print.

3. Continuous Strong Competition From Foreign Tech Giants

The dominance of big tech companies, particularly Google and Facebook, has fundamentally disrupted traditional media business models. In Malaysia, these tech giants command an estimated 80% to 90% of digital advertising revenue, significantly impacting the financial viability of traditional media outlets. This monopolistic control over digital ad spending presents substantial economic challenges for media companies, undermining advertising and subscriptionbased revenue streams. The lack of a regulatory framework exacerbates these challenges, allowing big tech firms to operate with less oversight and accountability, further complicating efforts to manage misinformation, bias, and content control.

The potential regulation mandating Google and Meta to compensate news providers is not just a potential change, but a potential lifeline for the media industry. If put into effect, this regulation could serve as a much-needed revenue stream for traditional media companies, offering a counterbalance to the financial pressures imposed by the dominance of big tech. The actual impact of this regulation will hinge on the specifics of its implementation, including the payment structures and criteria for compensation.

However, the timeline for implementing such regulation remains to be determined, adding a layer of uncertainty to its potential impact. Media companies, including those consulted, acknowledge the transformative potential of this regulatory change but lack visibility on when it might be enforced. As the digital market continues to evolve, introducing such regulations could play a crucial role in rebalancing the media landscape, ensuring fair compensation for content creators, and fostering a more sustainable ecosystem for traditional media outlets.

Recommendation

In all, we maintain our UNDERWEIGHT stance on the media sector with recommendations of SELL on ASTRO (TP: RM0.36), STAR (TP: RM0.385) and MEDIA PRIMA (TP: RM0.45). We remain cautious on the media sector’s near-term prospects with expectations for lingering and aggravating macroeconomic headwinds to weigh on marketing and discretionary spending.

Key risks include weaker-than-expected: i) economic growth and ii) business and consumer sentiment.

Source: TA Research - 2 Jul 2024