Still stuck in the tunnel. The sector incumbents continued to post disappointing report cards in 1HCY17, mainly owing to the prolonged weak advertising revenue (as a result of subdued adex outlook on poor consumer spending sentiment and the shift from the traditional platform to digital media) as well as start-up losses on new initiatives. MEDIA was slammed in 1HCY17, recording a LATAMI of RM29m owing to RM133m impairment of its associate MNI, lower advertising revenue as well as higher opex. STAR’s 2Q17 results also disappointed due to lower-than-expected Print and Digital segments’ contribution as well as continued start-up losses incurred by its OTT, Dimsum. Its special dividend of RM0.30/share, meanwhile, came in as no surprise despite the first interim dividend failing to meet expectations. Similarly, MEDIAC’s 1Q18 results continued to remain weak but was relatively decent as compared to its peers. Meanwhile, despite ASTRO reporting a strong set of 1H18 numbers (mainly driven by lower-than-expected content cost), we deemed the results as in line with our expectation in view of the higher content cost ahead.

YTD total gross adex continued to deteriorate. In the absence of much-needed adex friendly events, the total gross adex continued to sink, by 14% YoY to RM3.5b in 7M17. While we expect a gradual recovery in adex growth in the remaining months (thanks to the SEA Games, holiday festivities as well as a seasonality factor), these positive feel-good factors are unlikely to provide any strong boost to the traditional media during the transformation phase. Change in consumer habits, behaviour, lifestyle and technology have reduced the barrier to entry of social network and has created a massive disruption to the 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 and digital media), we believe the country’s gross adex (ex-Pay TV) will continue to face a challenging time and weaken by 10.5% YoY in CY17 after the 10% YoY dip a year ago.

Catalyst removed; uncertainty ahead for the print players. STAR’s immediate catalyst had been removed following the RM0.30/share special dividend announced post the completion of its divestment in Cityneon. Indeed, the group has resumed its M&A road-path and is eyeing new profitable ventures to recoup the loss of earnings. Besides considering investments in other industries or non-core businesses, the group does not rule out venturing into the regional market should the opportunity arises. All in, while concurring with the management’s view, we are concerned that the group may need to pay a higher price for the earnings' accretive-based industries/companies. Separately, MEDIAC also announced the lapse of the share transfer agreement in relation to the disposal of its 73.01%-owned Hong Kong-listed OMG in late August. The disappointing announcement suggested that potential special goodies may no longer be on the cards (where we had earlier anticipated for the group to reward its shareholders’ posts the disposal of OMG). MEDIA, on the other hand, believes there are still rooms for further kitchen sinking exercises required in coming months despite posting a one-off impairment charge in 2Q17. With the Odyssey strategies in place, we understand that the group is set to further optimise its costs structure (especially its operating and overhead costs) to align with its digital transformation journey.

OTT contents – a new battlefield for broadcasters? All the broadcasters appear to believe over-the-top (OTT) content is the future and have launched their respective OTT platforms (i.e. ASTRO’s GO & Tribe/MEDIA’s Tonton/STAR’s Dimsum) to focus on both the local and regional markets. Similarly, most of the regional broadcasters are also offering similar OTT platforms with identical offerings that mainly focus on Asian contents. The key differentiating factors, we believe, are likely to come from original IPs and localised contents, which could potentially lead to higher spending on content cost moving forward. Besides, piracy; subscription price and broadband quality/speed remain the key challenges to OTT players, especially in the Asian region.

ASTRO (OP, TP: RM3.00) remains our preferred pick for the sector for its relatively resilient earnings and decent dividend yield (c.5%). The challenge, however, is still expected to come from the growing piracy threat which could continue to rise as a result of rising cost of living and better viewing experience from higher Internet speed. Having said that, the group’s decent home-shopping business and higher adex revenues are expected to provide cushion to earnings should any shortfall arises in its Pay-TV segment. We reiterate our MARKET PERFORM call on MEDIAC (TP: RM0.47) and UNDERPERFORM ratings for both STAR (TP: RM1.80) and MEDIA (TP: RM0.65) in view of their bleak outlook ahead.

Source: Kenanga Research - 6 Oct 2017