KUALA LUMPUR (July 5): The road ahead will be tougher for media players, especially those in print, given the soft advertising market amid an uneventful second half of the year (2H18), according to a local bank-backed research house.

There will also be pressures of rising industry competition and raw material prices, said Hong Leong Investment Bank (HLIB) research analyst Rachael Hong, in a note on the sector outlook released this morning,

According to Hong, advertising expenditure (adex) contracted in the first quarter of this year (1Q18) by 7.6% year-on-year (y-o-y), with print adex continuing to be hit the hardest, plunging by 20.7% y-o-y.

“We expect to see a slight adex improvement in the up-coming 2Q18 results in August, mainly driven by the general elections (GE14), World Cup and Hari Raya,” said Hong.

However, she cautioned that the momentum of the adex uptrend might not continue moving into the 2H18, as 2H18 will not be as eventful as 1H18.

Furthermore, due to recent paper shortages, newsprint price has risen by about 35% on year, hovering at around US$680 to US$710 per metric tonne currently.

“If the price continues to surge, we may witness margin compressions for Star Media Group Bhd, Media Prima Bhd, and Media Chinese International Ltd (MCIL). However, the financial impact from rising paper price will only be seen later as most print players pre-load their inventories 3 to 6 months forward,” read the note.

The higher cost coupled with shrinking advertising revenue and declining circulation rate will therefore hit the profitability of the print segment hard, added Hong.

Pay-TV Astro Malaysia Holdings Bhd may also face downward presures in its subscription rate, she said.

This is due to the government’s promise to make broadband services more affordable with higher quality, which leads to over-the-top content providers such as Star’s Dim Sum and Media Prima’s Tonton playing more prominent roles.

Hong maintained her earnings forecast and an “underweight” view on the sector, given the lack of near-term catalyst, rising industry competition and raw material prices.

“We think that print will remain unfavourable and subscription rate for pay-TV will start to see a more disruptions. The road ahead will be tougher for the media players given the soft advertising market. It is crucial for the media players to evolve faster than ever and to differentiate from its peers," she said.

Hong downgraded Media Prima to ‘sell’ from ‘hold’ with an unchanged target price of 31 sen, as its share price spiked 39% since HLIB's last report without any material positive development.

At 9.43 am, Astro was up one sen at RM1.60, while Media Prima traded one sen lower at 53.5 sen. Star Media and MCIL are both untraded at the time of writing, with a last closing price of RM1.07 and 29.5 sen respectively.