This article first appeared in The Edge Financial Daily on October 1, 2018

Media sector
Maintain neutral: The Malaysian Insight on Sept 6 reported, citing sources, that Prime Minister Tun Dr Mahathir Mohamad was mulling a ruling to cap political parties’ ownership of mainstream media companies at 10%.

This report takes a look at: i) backgrounds of listed media companies with political-party shareholders; ii) possible suitors for media shares if it becomes the law for political parties to limit their stakes to 10%; iii) the potential prices and valuations of these media shares; and iv) the industry landscape and outlook.

There are only three mainstream media groups owned by political parties. MCA has a 43.1% stake in Star Media Group Bhd. Umno has a 49.8% stake in Utusan Melayu (Malaysia) Bhd and a 7.96% stake in Media Prima Bhd.

Both these parties are part of the Barisan Nasional coalition, which was deposed for the first time in the 14th general election (GE14) in May 2018.

Media companies’ share prices have fallen by 25% to 48% since the May 18 election and 26% to 58% year to date. The declines were symptoms of degenerating profitability in the wake of the digital media influx. Utusan, which fell the hardest, slipped into the financially distressed Practice Note 17 status in August 2018. Advertisers, meanwhile, took a pause in spending after GE14, accelerating the drops in media companies’ earnings.

Star, Utusan and Media Prima are trading at 32% to 82% discounts to their book values (BVs).

We believe a one times BV is the fairest valuation for profitable companies, and it has been used previously for government-decreed takeover exercises for various sectors, namely banking and water services. Should there be a takeover offer, we see Utusan as having the highest likelihood of facing a general offer due to the sheer size of Umno’s stake.

We believe that more independent journalism is positive for media companies in the long run, as they can potentially attract more advertisers. But the earnings volatility surrounding the sector may cap the short-term upside. An upside risk for the sector is a faster prognosis of profitability for the companies’ non-traditional media businesses. — CGSCIMB Research, Sept 28