We reiterate our NEUTRAL view on the media sector. We maintain our CY23 adex projection of a 2.2% contraction (CY22: an 8.6% growth) as we believe advertisers will remain cautious on marketing spend given sustained inflationary pressures and a sluggish economic outlook. We are also mindful of the cord cutting trend and continued marginalisation of print media. On a brighter note, media companies currently have a leaner cost structure following the implementation of restructuring measures and costs optimisation in recent years. Furthermore, except for ASTRO (MP; TP: RM0.56), media players are currently in a net cash position, providing a war chest for acquisitions to reinvent their business models. Zooming in on 4QCY23, we expect adex to be seasonally stronger due to increased product advertising during year-end festivities. Our top pick for the sector is STAR (OP; TP: RM0.54).

Anaemic adex outlook. We maintain our CY23 adex projection of a 2.2% contraction (CY22: an 8.6% growth) as we believe that advertisers will remain cautious on marketing spend. This is underpinned by sustained inflationary pressures and a sluggish economic outlook. The latter corresponds with our in-house projections, where we project slower GDP growth of 3.5%-4.0% for Malaysia in 2023 (2022: 8.7%, 1H23: 4.2%). Against this backdrop, both consumers and businesses will continue to scale back on discretionary and promotional spending, respectively.

Businesses tightening marketing spend. Furthermore, according to the Malaysian Institute of Economic Research (MIER), the Consumer Sentiment Index contracted by 8.4 points to 90.8 in 2Q23. This is far below its optimism threshold of 100 points, and implies that consumers are conserving cash given their lack of confidence in the economy. On top of that, MIER’s Business Conditions Index dipped by 13 points to 82.4 in 2QCY23. This translates to its lowest level since 2Q20, and indicates business owners’ pessimism amidst declining sales. In turn, this implies tighter marketing budgets that will crimp advertising spend.

Given the context above, 1HCY23 adex contracted by 2.4% YoY to RM3.1b as marketing spend plunged for newspapers (-17% YoY), television (-0.5% YoY) and radio (-2% YoY). Moreover, the decline was exacerbated by a high base in CY22 following revenge spending caused by pent-up demand during the pandemic.

Erosion in newspapers’ share of adex. Recent adex data aligns with current industry trends where advertisers side track traditional media in favour of digital channels. Evidently, digital media expanded its market share to 22% in 2QCY23 (2QCY22: 21.5%) at the expense of newspapers. Correspondingly, newspapers’ share of adex has now shrunk to 13.8% in 2QCY23 versus 16.8% a year ago. This translates to almost half of its market share of 26.6% back in 1QCY20. Unfortunately, digital newspaper websites are unable to capture the lost market share - as evident from youtube.com’s significant share (88%) of digital adex. Therefore, the outlook for newspaper publishers remain gloomy given the structural trend where consumers shift to digital platforms such as social media, apps and websites.

Unabating subscriber churn for Pay TV. Meanwhile, we believe that the cord cutting trend will prevail for Pay TV as it faces the double whammy of: (i) intense competition from OTT streaming services such as Netflix and Disney Hotstar, and (ii) subscriber churn as consumers tighten spending to cope with heightened costs of living. Moreover, disposable incomes are expected to be squeezed further by the government’s ongoing subsidy rationalization and looming implementation of targeted fuel subsidies. This is expected to impact the M40 and T20 segments that comprise the lion’s share of Pay TV subscribers.

Neutral due to a murky earnings outlook. We maintain our NEUTRAL view on the sector given that media companies now have a leaner cost structure following the implementation of restructuring measures and cost optimization in recent years. Furthermore, except for ASTRO, media players are currently in net cash position, providing a war chest for acquisitions to reinvent their business models. However, we remain cautious due to weak adex spend, the cord cutting trend and continued marginalisation of print media.

Moving forward, we expect 4QCY23 adex to be seasonally stronger due to the ramp-up in product advertising for year-end festivities. Our top pick for the sector is STAR given its: (i) proactive plans to future proof its earnings via a 5-year transformation journey, (ii) strong balance sheet with sizeable war chest, and (iii) traction in efforts to transition to digital media.

Source: Kenanga Research - 9 Oct 2023