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This article first appeared in The Edge Malaysia Weekly, on November 16 - November 22, 2015.

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THE valuations of media stocks are attractive at the moment, with decent dividend yields of no less than 6% at current market prices. As at Nov 11, Media Prima Bhd had a 12-month trailing dividend yield of 7.85%, Star Media Group Bhd’s was 7.56% and Media Chinese International Ltd (MCIL), 6.71%.

However, media analysts will probably tell you that this breed of stock isn’t quite “screaming buy”, at least at the moment. This is because the print media business is expected to suffer from a double whammy of higher newsprint cost and lower advertising expenditure (adex).

The sharp depreciation of the ringgit has inflated the cost of newsprint — a key cost component for print media companies — even though prices have been declining in the international market.

Based on the FOEX Index, which tracks paper and pulp price movements, newsprint prices have been on a downward trend since January this year, falling 8.7% to a four-year low of €436.40 per tonne as at the latest quote on Nov 11.

But print media companies are unable to benefit from this due to the ringgit’s decline, which has more than wiped out any potential gains, analysts say.

They add that media companies’ earnings for the quarter ended Sept 30 may start to see the adverse impact of the softer ringgit as newsprint is purchased in US dollars or euro.

In the third quarter, the ringgit fell by almost 17% to 4.69 against the euro and over 13.5% to about 4.19 against the greenback.

Nonetheless, media companies have a tendency to stock up on newsprint to secure their supply — hence, the increase in cost may not be that prominent yet.

Media analysts say Star Media Group (fundamental: 2.50; valuation: 1.40) has about 10 months’ worth of stock while MCIL and Media Prima have six months and four months respectively.

According to Maybank Investment Bank Research’s channel checks, Star Media Group buys some 50,000 tonnes of newsprint a year while Media Prima purchases 70,000 tonnes and MCIL (fundamental: 2.40; valuation: 1.80), 130,000 tonnes. These players source from both foreign suppliers and local miller, Malaysian Newsprint Industries, which prices itself close to market.

“This will just be a short-term reprieve for them given that the ringgit is likely to stay weak at current levels,” one analyst says.

Among the public listed print media companies, Media Prima sees the least contribution from its print media business, which contributes 40% to its revenue. In contrast, Star Media Group probably sees the highest contribution — almost 80% of its total revenue. Meanwhile, MCIL’s print revenue from the Malaysian and Asian markets makes up close to 60% of its revenue.

A media analyst from Maybank IB Research believes that if the ringgit remains at current levels, these companies will be able to withstand the thinner margins for another year. “But any longer than that and they may have to cut back on the number of pages [used] to keep costs down,” he says.

According to an analyst with UOB Kay Hian Research, newsprint forms the largest operating cost for the companies’ print segment. “For Media Prima, newsprint accounts for about 86% and 14% of the print segment’s and the group’s operating cost respectively.”

Media Prima is the only print media stock covered by UOB Kay Hian Research.

Newspapers under Media Prima (fundamental: 1.95; valuation: 2) are New Straits Times and Malay language dailies Berita Harian and Harian Metro. MCIL publishes Sin Chew Daily, China Press, Guang Ming Daily and Nanyang Siang Pau.

While the print media sector braces for the rise in newsprint prices, there is also little excitement on adex revenue.

According to data from AC Nielsen, industry adex was down 6% in 3Q2015 compared with the previous quarter. For the nine months to September, it was down 2% compared with the year before.

Some improvements were seen in September, however — adex rose 3% month on month.

The newspaper and free-to-air television segments have been the worst hit this year.

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“The newspaper segment’s share of the adex market is 31% so far this year versus 34% in 2014,” Bala Pomaleh, chief executive of Carat Media Services (M) Sdn Bhd, tells The Edge, citing AC Nielsen’s research.

Besides losing adex to digital media, Bala says weak crude oil prices have forced the government to reduce its spending on advertising.

The Maybank IB Research analyst observes that in the last three to four months, the government has cut its adex by about half. “The government has been cutting back on spending because of the low crude oil prices and this will probably continue for a while.”

This has affected the sector as the government typically makes up 8% to 10% of total industry adex.

For the nine months to September, the Prime Minister’s Office spent only RM11 million, barely 9% of the RM124 million it had spent last year, according to AC Nielsen.

Maybank IB Research expects 3Q2015 to be a weak quarter for the media sector. However, there could be some seasonal upside from corporates using up their advertising budgets towards year end.

“For all intents and purposes, this year has been a bad year, so we would expect some recovery next year but it will be fairly muted,” the analyst says, adding that he does not see any catalyst for the sector in the near term.

Next year, there is the Rio 2016 Olympics and UEFA Euro 2016, and any major sporting event usually augurs well for adex. However, some say the weak consumer sentiment may dampen spending.

“If consumer sentiment remains weak, we may see a repeat of 2014 when the FIFA World Cup failed to lift adex spending,” another analyst says.

Both AllianceDBS Research and UOB Kay Hian Research are expecting a subdued outlook for media stocks due to the poor consumer sentiment.

“The high level of inflationary anxiety and further deterioration in the financial strength of consumers had resulted in the Consumer Sentiment Index declining to 71.7 in 2Q2015 — its lowest since 4Q2008. The weakening economic outlook and the implementation of the Goods and Services Tax are also expected to negatively influence adex spending in this quarter,” says a UOB Kay Hian Research analyst.


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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