We downgrade our sector recommendation to UNDERWEIGHT (from NEUTRAL) on the media sector due to: (i) continued slump in adex market share for traditional media, (ii) sustained cord cutting trends, and (iii) advertisers maintaining their tight grip on marketing budgets awaiting sentiment rebound. We also introduce our CY24 adex projection of a 0.4% contraction on the back of pessimistic outlook from Malaysian consumers and businesses due to inflationary pressures, reduction in export orders, and rising operating costs. Our sole OP recommendation for the sector is STAR (OP; TP: RM0.52).

Anaemic outlook for adex. We introduce our CY24 adex forecast of 0.4% contraction (CY23F: 0.5% contraction), underpinned by expectation that advertisers will remain prudent on marketing activities. This is attributed to sustained weak sentiment for both consumers and enterprises. Our views are corroborated by recent studies conducted by the Malaysian Institute of Economic Research (MIER) that were revealed last month. Based on the studies, Malaysian consumers and businesses have turned more pessimistic in 3QCY23. This is due to the following reasons: (i) inflationary pressures eroding spending power, and (ii) reduction in export orders amidst rising operating costs.

Sentiment remains stubbornly weak. Evidently, MIER’s Business Conditions Index fell by 2.7 points to 79.7 in 3QCY23 (2QCY23: 82.4, 3QCY22: 99.8) – which translates to its lowest level since 2QCY20 during the onset of the pandemic. On the same note, MIER’s Consumer Sentiment Index sustained its downtrend in 3QCY23, via a sequential decline of 11.9 points to 78.9. This implies its lowest level since 2QCY21, back when Malaysia entered a new pandemic lockdown phase. On the other hand, inflation eased to 1.8% in October, which equates to its lowest level since April 2021. In spite of this, respondents surveyed by MIER remain downbeat - with 91% expecting a hike in inflation, whilst merely 20% anticipating incomes to rise. On the back of this, we believe that advertisers will continue to tighten their grip on marketing budgets until sentiment rebounds.

9MCY23 adex softer in spite of state elections boost. Against the above backdrop, 9MCY23 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). Furthermore, whilst 3QCY23 adex was uplifted by state elections, we do not expect it to recur in the medium term given that state polls are held every five years. Moving forward, for CY24, we expect adex to be relatively subdued given the lack of major catalyst events. For 2024, except for the Thomas Cup tournament and Winter Olympics, there are no major upcoming elections or global sports events (such as the likes of Summer Olympics, World Cup). In comparison, FY23 was boosted by state elections (as mentioned earlier) as well as SEA Games and Asian Games.

Media landscape is dominated by digital platforms. The outlook for traditional publishers remains gloomy given the structural trend where eyeballs are shifting to new digital platforms such as social media, mobile apps and websites. Unfortunately, newspaper and magazine websites are unable to capture their lost market share - as illustrated by youtube.com’s significant share (88%) of digital adex in 3QCY23. Ironically, traditional media websites in Malaysia partially rely on social media for: (i) adex revenues and (ii) digital traffic. This was evident in the case of MCIL (UP; TP: RM0.10), where 1HFY24 adex declined by 10%, mainly due to changes in Facebook’s news feed algorithm and termination of its instant articles service since April 2023. This had led to: (i) fewer readers being directed to MCIL’s sites, and (ii) reduction in direct programmatic advertising revenue from Facebook.

Intensified threat from the rise of AI. Moving forward, we believe that continued advancement in artificial intelligence (AI) may widen the competitive lead held by international media platforms and social media. For instance, the application of AI in streaming platforms (i.e. Youtube, Spotify, Netflix and Disney Plus) results in personalized curated content that corresponds to the preferences of each individual. Hence, this leads to audience loyalty on the back of enhanced experiences, engagement, and satisfaction. On the same note, commercials are also personalized for audiences via AI – which compels advertisers to prioritize mediums that have AI-powered features. On the other hand, this does not apply to traditional media (i.e. newspapers, magazines, FTA TV, radio), with the exception of Pay TV.

Downgrade due to murky earnings outlook. We downgrade our sector recommendation to UNDERWEIGHT (from NEUTRAL) as we believe that the writing is on the wall for traditional media, unless they are able to radically reinvent themselves. In the meanwhile, whilst the latter takes place, we believe their market share for adex will continue to slump. Our sole OUTPERFORM recommendation 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 - 12 Dec 2023