KUALA LUMPUR (Nov 10): RAM Ratings Services Bhd (RAM Ratings) has downgraded the ratings of Media Chinese International Ltd (MCIL), Media Prima Bhd and Star Media Group Bhd as ongoing structural changes in the industry and an accelerated decline in advertising expenditure (adex) have considerably weakened the trio's operating performances.

The move came on the heels of a revision on the outlook of their ratings to negative in June, it said in a statement today.

MCIL's RM500 million Medium-Term Notes Programme (2014/2029) has been downgraded to AA2/Negative from AA1/Negative, while Media Prima's corporate credit rating has been downgraded to AA3/Negative/P1 from AA1/Negative/P1. Likewise, Media Prima's RM500 million Commercial Papers/Medium-Term Notes Programme (2012/2019) has been downgraded to AA3/Negative/P1 from AA1/Negative/P1.

As for Star, its RM750 million Commercial Papers Programme (2011/2018) rating was maintained at P1, while its RM750 million Medium-Term Notes Programme (2011/2026) was downgraded from AA1/Negative to AA2/Negative.

RAM Ratings said the traditional media sector continues to be impacted by the structural shift towards digital platforms.

"Technology-driven changes in media consumption and the proliferation of digital platforms such as search engines, social media and digital video have intensified competition within the advertising space.

"Combined with the still-weak consumer sentiment and cautious corporate spending, real adex — on TV and print fell for the fourth straight year in 2017," the ratings agency said.

Notably, RAM Ratings said the downward spiral in adex has further accelerated since its last sector review in June.

"In the first half of 2017 (1H 2017), real adex — on TV and print dropped almost 14% (2016: -10%; 2015: -7%). On the contrary, we expect digital advertising — reported to have expanded by 20% in 2016 — to continue to gain traction at the expense of traditional advertising mediums," it said.

Double-digit declines in advertising and circulation revenue have taken a toll on the profitability and cashflows of all three rated media players.

"The revenue and operating profit before depreciation, interest and tax of these entities deteriorated by 8% to 19% and 47% to 82%, respectively, in 1H of 2017.

"That said, we envisage all three players remaining dominant within the traditional media industry, with fairly healthy balance sheets.

"STAR and MCIL are expected to maintain their conservative balance sheets and net-cash position. However, Media Prima's gearing is likely to weaken to 0.5-0.6 times from 0.31 times as at end-June 2017 as it takes on more debt to fund capex and investments," said RAM Ratings.

The ratings agency added that Media Prima's weaker balance sheet relative to its peers, coupled with the poor operating performance of its TV segment which was its largest revenue generator at 44% in its financial year ended Dec 31, 2016 (FY16), led to a steeper downgrade of its ratings.

"With lower adex across all its channels, the TV segment's operating profit plunged 90% in 1HFY17. Going forward, the shifting TV landscape brought on by the migration from analogue to digital terrestrial TV (DTTV) broadcast in June 2018 could add to its challenges," it said.

It further added that Media Prima's ratings further reflect its sizeable losses in FY16 and 1HFY17 — weighed down by the weak showing of its TV and print segments, start-up losses of new ventures as well as hefty one-off expenses mainly to address structural changes.

"We note that Media Prima plans to reduce its reliance on TV and print ad revenue by expanding its home-shopping, digital and overseas contributions.

"Double-digit revenue growth from its home-shopping venture under its Odyssey strategy [has] helped offset the decline in adex to a certain extent.

"However, Media Prima's performance is expected to stay pressured in the near term as its new home-shopping and digital initiatives are still in their gestation periods," it added.

Meanwhile, the negative outlook on the ratings of the three players as well as the sector has been maintained to reflect lingering concerns that adex will fall even more rapidly going forward, it said.

"It remains to be seen if the players will be able to navigate the challenging operating environment to sustain a business profile commensurate with their current ratings. In the case of Media Prima, the negative outlook also takes into account continued uncertainties over TV digitalisation.

It said Media Prima and MYTV Broadcasting Sdn Bhd — the licensed operator of infrastructure and network facilities for DTTV services in Malaysia — have yet to reach a deal on transmission rates, given the steep pricing.

"Moreover, migration to DTTV may harm Media Prima's already declining viewership, in the event of poor execution of the digital rollout and/or a low take-up rate of set-top boxes," it said.