Media sector’s adex facing challenging times

This article first appeared in The Edge Financial Daily, on July 10, 2017.
-A +A

Media sector
Maintain neutral call:
The sector incumbents continued to post disappointing report cards in the first quarter calendar year 2017 (1QCY17), mainly due to a prolonged, weak advertising revenue (as a result of a subdued advertising expenditure [adex] outlook on poor consumer spending sentiments and the shift from traditional to digital media) as well as start-up losses on new initiatives. 

Media Prima Bhd was the worst hit in 1Q of financial year (1QFY17)  and recorded a loss after tax and minority interest (Latmi) of RM39 million (as a result of lower-than-expected advertising revenue and persistently high overhead costs) followed by Star Media Group Bhd, where the surprises were mainly caused by its lower print and radio segments’ contributions as well as start-up losses incurred in its new over-the-top content (OTT) venture. 

Media Chinese International Ltd, on the other hand, released full-year results that appeared relatively decent as compared to its peers despite its performance. 

Astro Malaysia Holdings Bhd’s first quarter ended April 30, 2017 (1QFY18) results, meanwhile, came in within expectations as the lower unrealised foreign exchange (forex) gain and stable margins have offset the weak top-line performance, leading the group’s core profits after tax and minority interest (Patmi) to grow 5% year-on-year (y-o-y). 

While the country’s 2017 adex sentiment is set to be supported by [email protected], (Asean’s 50th anniversary celebrations), 29th Sea Games, 9th Asean Para Games, and a potential 14th general election, these feel-good factors, however, are unlikely to provide any strong boost to traditional media. 

Changes in consumer habits, behaviour, lifestyle and technologies have reduced the barrier to the entry of social network and created massive disruption to traditional media. 

Thus, in view of the subdued adex outlook (as a result of the rising cost of doing business) and heightened competition (that followed the emergence of social networks), we believe the country’s gross adex (ex-Pay TV) will continue to face a challenging time and weaken by 4.7% y-o-y in CY17 after the 10% y-o-y dip a year ago. Note that the country’s gross adex (ex-Pay TV) has dipped 13.6% y-o-y to RM2.48b during the first five months of 2017. 

Star shareholders could have potentially received a special dividend (of up to RM0.487/share) should the proposed disposal of its 52.51% stake in Singapore-listed Cityneon have been granted approval by its stakeholders in its July 7 extraordinary general meeting (EGM). 

To recap, Star has entered into a conditional share purchase agreement with Lucrum 1 Investment for the proposed disposal of its entire stake in its event arm, Cityneon, for S$0.90/share (or an equivalent of RM360.18 million). 

The disposal is set to allow Star to unlock its investment in Cityneon and concentrate on the expansion of its primary business activities. Having said that, in view of the decent net proceeds (about RM359.6 million) arising from the proposed disposal, we do not discount potential special goodies should there be no major capital expenditure (capex) or acquisition in the pipeline. 

Separately, a potential “angpow” could also be on the cards for Media Chinese should the group manage to dispose of its 73%-owned Hong Kong-listed One Media Group Ltd (OMG)(which is primarily involved in the publishing of Chinese-language lifestyle magazines and provides digital and outdoor media services in the Greater China region) in 2H17. 

Media Chinese expects  to record a net disposal gain of about HKD358.6 million (about RM200 million or RM0.12/share) with minimal financial impact on its recurring income due to OMG’s loss-making status. 

While we concur with the management’s digital and transformation road path (to expedite digital transformation as well as widen the non-ads segment contribution), the evolution of the traditional media could continue seeing the group experiencing some gestation period over the short-to-medium term. 

Astro (outperform [OP], target price [TP]: RM3.00) remains our preferred pick for the sector for its relatively resilient earnings and decent dividend yield (about 5%). 

We reiterated our OP call on Media Chinese (TP: 65 sen, in view of the potential special dividend) and underperform rating on Media Prima (TP: 85 sen). 

Star’s rating remains as underperform with an unchanged TP of RM1.85. We are likely to review our call and TP should the group manage to receive shareholders’ approval (in the July 7 EGM) to dispose of its event arm. — Kenanga Research, July 7