Media sector
Maintain neutral: We are keeping our “neutral” view on the media sector due to lack of key earnings catalysts. The prolonged weak consumer sentiment is expected to mire the country’s advertisement expenditure (adex) outlook for calendar year 2017 (CY17) despite several adex-friendly events. Decent dividend yields of 4% to 7% appear to be the only saving grace for the sector.
We make no changes to all our media companies’ earnings estimates for now. Astro Malaysia Holdings Bhd (outperform; target price [TP]: RM3.02) remains our favourite pick in the sector in view of its relatively resilient earnings and decent dividend yield.
We reiterate our “market perform” call on Star Media Group Bhd (TP: RM2.32) while keeping an “underperform” rating on Media Prima Bhd (TP: 90 sen). Our Media Chinese International Ltd (MCIL) TP is maintained at 59 sen, but its rating is raised to “market perform” as its share price has slumped 20% since our last downgrade in August 2016.
The sector incumbents’ third quarter of CY16 (3QCY16) results were disappointing, mainly dragged by the prolonged weak advertising revenue as a result of economic uncertainties and poor consumer sentiment as well as high operating expense.
Media Prima was the worst hit among its peers in 3QCY16, recording a core loss after tax and minority interest (Latmi) of RM4.8 million. Besides, its one-off restructuring expense of RM105 million for the print segment also weighed on Media Prima’s performance in 3QCY16, leading the group to record a Latmi of RM109 million.
Star Media Group and MCIL’s 3QCY16 results, meanwhile, were pulled down by feeble top-line performance and thinner margins, but former was partially cushioned by stronger performance of its events division. Astro’s third quarter of 2017 (3Q17) results, on the other hand, came in within expectations, mainly underpinned by higher e-commerce and adex revenues. Its Pay TV segment churn rate, however, hit another record high level at 12.4% (versus 10.9% in 2Q17) as a result of weak consumer spending sentiment and a growing piracy trend.
Nielsen Media recently reported that the country’s year-to-date (YTD) November gross adex deteriorated by 10% year-on-year (y-o-y) to RM6.47 billion (versus YTD October’s -9.6% y-o-y) as the prolonged weak adex sentiment, customer fragmentation, technological advancement and shift in advertisement to digital media continued to pose great challenges to the incumbents. The biggest adex contributor — newspapers — was lower by 13.2% to RM3.3 billion YTD November with weakness in all medium languages.
On the financial front, print players are likely to continue facing a challenging quarter in 4Q16 judging from the weakening quarter-to-date (QTD) November gross adex performance where Media Prima, MCIL and Star Media Group have dipped by 25%/22%/14% y-o-y respectively.
On the free-to-air TV segment front, Media Prima’s QTD November gross adex bucked from the earlier deterioration trend and climb 3.1% y-o-y to RM511 million. The growth, however, is expected to be offset by a higher discount rate, given the shift from traditional media channels to more quantifiable, data-centric and cost-effective mediums like the Internet and mobile advertising.
Tough times remain in 2017 despite several adex-friendly events. While the country’s 2017 adex sentiment is set to be supported by the Asean@50: Golden Celebration campaign, 29th Sea Games, 9th Asean Para Games and a potential 14th general election, these feel-good factors, however, are likely to be offset by a weak ringgit against the US dollar, the rising cost of doing business and the subdued global economy outlook as a result of uncertainty post-Brexit and concerns about the US’ trade policies following Donald Trump’s presidential victory.
All in, we are expecting the country’s gross adex (ex-Pay TV) to be flat on a y-o-y basis in CY17 after the 10% y-o-y dip in CY16.
Despite newsprint prices — the biggest cost component of print media which is expected to remain firm at the US$500/tonne range in CY17 as a result of weak demand and a subdued global economy outlook — print players such as Media Prima, MCIL and Star Media Group may not benefit from the current steady cost structure given that newsprint prices (in ringgit terms) have climbed to RM2,200/tonne from RM2,000/tonne previously as a result of the weak US dollar/ringgit exchange rate.
That said, the print players need to reduce newsprint consumption and continue migrating readers to the e-paper segment in order to curb newsprint cost. It may have an adverse impact on the print players should the ringgit continue to depreciate against the US dollar.
Astro remains our top pick for the sector for its relatively resilient earnings and decent dividend yield of 5%. The challenge, however, is expected to come from the growing piracy trend, which could continue to rise as a result of rising cost of living and better viewing experience on higher Internet speeds.
Having said that, the group’s growing home-shopping business and adex revenues are expected to provide cushions to its earnings should any shortfall arise from its Pay TV segment. MCIL, Media Prima and Star Media Group’s print ad revenues, meanwhile, are expected to continue to face headwinds in CY17 as adex sentiment is expected to remain cautious due to economic uncertainties.
Having said that, Star Media Group’s events division is expected to remain robust, driven by its Avengers and Transformers intellectual property rights. — Kenanga Research, Jan 5