Maintained NEUTRAL in view of persistently challenging prospect amid soft adex outlook coupled with disruptive new technologies that continue to reshape the media industry. Despite most of our media companies trading at near, if not, trough valuations, there are no immediate earnings catalysts for now. Indeed, extensive shares overhang concerns may emerge should the stake-limit ruling is applied. There are no changes to our media companies’ earnings estimate, but we raise our STAR’s rating to OUTPERFORM (in view of more than 10% upside with a decent dividend yield of c.7%) with unchanged TP of RM0.950. We maintain our calls and TPs on MEDIA (UP, TP: RM0.300) and ASTRO (MP, TP: RM1.60) but raise MEDIAC’s (TP: RM0.250) rating to MP (vs. UP previously).

Still in the woods. The sector incumbents’ report cards for 2QCY18 remained uninspiring, mainly due to the prolonged weak advertising revenue as a result of subdued adex outlook on poor consumer spending. STAR’s 2Q18 results came in below (owing to lower-than-expected top-line and higher-than-expected OPEX) while the absence of dividend was a negative surprise. MEDIA’s report card, on the other hand, remained disappointing, mainly due to our overly optimistic forecast and higher-than-expected direct and overhead costs. On the flip side, MEDIAC posted a reasonable set of results in 1Q19, which accounted for 31%/30% of our/consensus’ full-year estimates, thanks to the seasonally strong contribution from its travel segment. Despite the decent 1Q19 performance, we believe the group’s publishing business to remain challenging in view of the soft consumer sentiment and on-going print-to-digital evolution. ASTRO, on the other hand, posted a disappointing 2Q19 result owing to the higher content cost and weak adex.

Shareholdings limit in media companies. Press has earlier reported that the government is looking at reducing the stakes held by political parties in media companies to 10%. The proposal to curb media stakes by political parties came after the government repealed the Anti-Fake News Act – a controversial legislation hastily passed by the previous Najib’s government weeks before the election. Despite the proposed move to limit politically-linked stakes, there has been no decision made by the authority thus far. Nevertheless, we understand that Putrajaya is considering setting rules to limit political parties’ and other entities’ shareholdings in media companies, including private organisations or individuals to enhance press freedom and media independence for the country.

Shareholding structure dilemma. Should the stake-limit ruling is implemented, most of the mainstream media companies are expected to be affected given that their top 2 or 3 major shareholders control more than 10% effective interest through various entities. Top of the list is STAR, which is controlled by the Malaysia Chinese Association (“MCA”) with 42.46% equity stake followed by its second largest shareholder - Amanah Saham Bumiputera, which owned 10.0% stakes, based on its FY17 annual report. The group’s current market capitalisation stood at RM683m while its NTA/share was at RM1.08 as of end 2Q18. MEDIAC, on the other hand, is controlled by Tan Sri Datuk Sir Tiong Hiew King, who has a 5.2% direct equity stake in the company but owned 46.2% indirect interest through various entities. The group has an outstanding share of 1.69b with market capitalisation of RM472m and NTA/share of 39.0 sen as of end-June 2018. ASTRO, meanwhile is controlled by a low profile billionaire – Ananda Krishnan- linked entities with a combined equity stake of 40.9% followed by a state-owned investment arm – Khazanah (20.7%). The group has an outstanding share of 5.2b with market capitalisation of RM8.8b and BV/share of 13.1 sen. On the flip side, MEDIA is likely to be a relatively safer under the potential new ruling given that its largest shareholder - Morgan Stanley merely controlled a 12.7% equity stake followed by the EPF board at 11.8% as at 20th September. The group’s NTA/share stood at 31.0 sen as of 1H18.

Potential shares overhang is a major concern. Extensive share overhang is expected to emerge should the stake-limit ruling is applied. Nevertheless, we are of the view that the proposed ruling is easier said than done as the stocks’ valuations could be a major concern. Having said that, we believe Putrajaya may likely provide the incumbents reasonable time frame to seek for new investors, if any, as well as to allow for exemption subject to the authority’s approvals.

Bumpy road ahead for Pay-TV operators. The introductions of higher broadband speeds coupled with more affordable subscription price packages are expected to enhance video streaming experience on over-the-top or illegal streaming sites. This could post a great challenge to the traditional subscription-based Pay-TV operators given that the younger generation, who grew up with video on demand and broadband, tend to consume content in their pocket devices rather than on the big screen. On top of that, more broadcasting licences are likely to be distributed as the new government is planning to liberalise and promote competition in the Pay-TV segment in order to create a healthier market space.

Sector’s call maintained at NEUTRAL. The sector’s prospect remains challenging amid the soft adex outlook coupled with new technologies that continue to reshape the media industry. Advertisers tend to continue to remain subdued towards the traditional media type (i.e. TV and Print) while seeking new opportunity in the digital media. All the media companies under our coverage are currently trading at near, if not trough valuations. While we are keeping all our media companies’ earnings forecasts unchanged for now, we have raised our STAR rating to OP (vs. UP previously) with an unchanged TP of RM0.950 (based on targeted FY19E P/NTA of 8.2x, implying -2SD below its 3-year mean) given that the share price has been penalised, dipping by 17% post the release of 2Q18 results and currently trading below our trough valuation. While there is no immediate earning's catalyst for STAR, its decent forward dividend yield of 7.2% could attract some yield-seeking investors. We made no changes to our MEDIA (UP, TP: RM0.300) and ASTRO’s (MP, TP: RM1.60) target prices but raised MEDIAC’s stock rating to MP (vs. UP previously, as its share price has corrected since our last downgrade) with an unchanged target price of RM0.250.

Source: Kenanga Research - 4 Oct 2018