Media sector
Maintain neutral: 2016 gross advertising expenditure (adex) softened to RM7.1 billion (-10% year-on-year [y-o-y]) and within our expectations. The vulnerable adex performance was mainly led by the prolonged weak adex sentiment due to the rising cost of doing business. The guarded spending mode of the general public is not a surprise given that the consumer sentiment index has fallen to the 70% to 78% range in the first nine months of 2016, a similar level during the Asian financial crisis.

Customer fragmentation, technological advancement, and shift in advertisement to digital media continued to pose great challenges to the incumbents. The persistently weak ringgit (against the US dollar) also led to some advertisers scaling back advertising and promotional budgets, thus dampening the ad spending appetite.

The positive December adex performance was mainly driven by all media types, except the in-store segment which dipped by 1.8% on-month. In 2016, total gross adex growth narrowed to -10% y-o-y, marking the second year of contraction, no thanks to the continued weak performance of the key segments, namely newspaper (-13.1%) and radio (-56.3%) albeit the fall being cushioned by the stable free-to-air (FTA) (+1.7%) segment.

The lacklustre gross adex performance in the fourth quarter of 2016 (4Q16) (-11.6% y-o-y; 2.7% quarter-on-quarter [q-o-q]) suggested that local media players may likely face another challenging results season. Based on our statistics, outlook for print media incumbents are likely to remain cloudy with Star Media Group Bhd’s 4Q16 gross print ads continuing to show weakness to RM207 million (-4.2% q-o-q; -19% y-o-y).

Media Chinese International Ltd’s (MCIL) gross print adex deteriorated by 12% y-o-y to RM171 million despite its performance improving on a sequential basis, thanks to the higher contribution from all print titles. Media Prima Bhd’s gross print adex, meanwhile, plunged by 22% y-o-y or 9.8% q-o-q to RM237 million as a result of deteriorating adex performance in its entire print segment, aligned with weak circulation numbers.

On the FTA television segment front, Media Prima’s gross adex advanced 2.7% y-o-y (7.6% q-o-q) to RM771 million in 4Q16. The mild improvement y-o-y was mainly driven by higher contribution from its flagship channel — TV3 (+7.3% y-o-y to RM328 million) but partially offset by weak performance from other channels. We expect Media Prima’s 4Q16 report card to remain uninspiring as a result of its weak print segment despite some early signs of improvement in its FTA segment.

While Malaysia’s 2017 adex sentiment is set to be supported by Asean@50: Golden Celebration campaign, 29th Sea Games, 9th Asean Para Games, and a potential 14th General Election, but these feel-good factors are likely to be offset by the weaker ringgit, rising cost of doing business, and subdued global economy outlook. We expect the country’s gross adex (ex-pay TV) to be flat in 2017 after the 10% y-o-y dip in 2016.

Astro Malaysia Holdings Bhd remains our top pick due to its relatively resilient earnings and decent dividend yield (about 5%). The challenge, however, is expected to come from growing piracy trend, which could continue to rise on rising cost of living and better viewing experience from higher Internet speed.

The group growing home-shopping business and adex revenues are expected to provide cushion to its earnings should any shortfall arise from Pay-TV segment. MCIL, Media Prima and Star Media’s print ads revenues are expected to continue to face headwinds in 2017 as adex sentiment is expected to remain cautious due to economic uncertainties. We expect Star’s event division to remain robust, driven by its Avengers and Transformers intellectual property rights. — Kenanga Research, Jan 19