Media:Expecting another poor quarter

Sector Update 10 June 2009

Equity Research PP11072/03/2010 (023549)

Expecting another poor quarter

Maintain Underweight. The 1Q09 results of media companies in our analysis were mostly below expectations due to the weak economic environment. The 2Q09 total adex is likely to contract YoY on lack of adex- friendly events this year. We revise our 2009 adex growth forecast from -3% to -9%. Media Prima and Star remain Sells while we downgrade Astro from Hold to Sell on rich valuations.

Dismal quarter. Except for Astro, the 1Q09 results of media companies were mostly below expectations due to the weak economic environment. We estimate that total adex and GDP growth are highly correlated at 0.9. Higher discounts led to lower net adex revenues and dashed hopes of recovery when the Mar ’09 gross total adex appeared relatively unchanged (-1% YoY, +30% MoM).

2Q08 high, a tough feat to repeat. May and Jun ’09 total adex is expected to be markedly lower YoY due to the high base set last year by the Euro 2008 ad spend. This lull may continue into Aug ’09 due to the high base set last year by the Beijing Olympics ad spend. Therefore, media companies are likely to experience at least another two quarters (2Q-3Q09) of net adex revenue contractions.

Expect total adex to contract 9% in 2009. Our economics team is now expecting domestic GDP to contract by 3.8% this year (-1.3% previously). An unchanged total adex growth/GDP growth multiple of 2.3x (Asian Financial Crisis multiple), led us to our revised 2009 total adex growth forecast of -9% (-3% previously).

Rich valuations, added risks. We expect adex sentiment to improve only in 4Q09 on better economic prospects. We would also be better able to gauge adex sentiment for 2010 then. We maintain our Underweight call on the media sector. Media Prima and Star are Sells while we downgrade Astro from Hold to Sell. Rich valuations (8.3x 2009 P/BV), may pose a set-back for corporate exercise involving privatisation, take-over of Maxis, or even a merger with Measat.

Media: Comparative valuations Company Rec Shr px Mkt cap TP Basis EPS (sen) PER (x) Div yield (%) P/B

(RM) RMm) (RM) 09F 10F 09F 10F 09F 10F 09F 10F

Media Prima Sell 1.24 1,058.7 1.00 PER 8.9 12.0 13.9 10.4 2.8 4.8 1.9 1.7

Astro Sell 3.18 6,150.2 2.70 DCF 8.4 11.5 37.9 27.7 3.1 3.1 8.3 8.0

Star Sell 3.22 2,378.2 2.54 PER 14.2 18.6 22.7 17.3 6.5 6.5 2.0 1.9

Source: Maybank-IB

Media Underweight (unchanged)

Yin Shao Yang [email protected] (603) 2297 8692

Media

10 June 2009 Page 2 of 9

Dismal quarter

Adex revenue contracted more than expected. The 1Q09 results of media companies were mostly below expectations. Except for Astro whose business model is predominantly subscribership- based, the others experienced double- digit YoY contractions in adex revenue while we were expecting high single- digit contractions. We attribute the poorer-than-expected performance to 1Q09 GDP contracting by 6.2% or 1.9 ppt more than we had anticipated. According to our estimates, total adex and GDP growth are highly correlated at 0.9.

High operating leverage and newsprint cost compressed margins. We estimate that the operating leverage of media companies is relatively high, ranging from 60% for newspaper companies (Star and NSTP) and up to 80% for TV companies (Astro and Media Prima). Except for Astro whose subscription revenue grew steadily, adex revenue contractions and higher newsprint cost (USD770/t to USD850/t after import duty) for newspaper companies compressed the 1Q09 EBITDA margins by more than 10 ppt YoY.

Table 1: Financial results of media companies (RMm)

1Q09 % YoY % QoQ % adex chg

Astro All Asia Networks*

Revenue 774.6 9.1 4.0 n.a.

EBITDA 245.9 20.1 4.2

EBITDA margin (ppt) 31.8 2.9 0.0

Core net profit 17.3 (69.3) 23.6

Media Prima

Revenue 141.2 (11.5) (32.4) (17.3)**

EBITDA 9.2 (70.5) (86.8)

EBITDA margin (ppt) 6.5 (13.1) (27.0)

Core net profit (9.9) (158.2) (127.3)

The New Straits Times Press (Malaysia)

Revenue 131.7 (9.8) (4.4) (13.0)

EBITDA 3.9 (81.7) (71.0)


Core net profit (2.9) (132.5) (140.6)

Star Publications (Malaysia)

Revenue 181.3 (11.4) (14.3) (22.0)***

EBITDA 41.8 (43.1) (34.1)


Core net profit 18.3 (57.0) (51.5) * Refers to Nov-Jan ’09 quarter (4QFY09) ** TV adex Source: Companies, *** Nielsen Media Research

Higher discounts dashed hopes. We believe there was unwarranted optimism when the Mar ’09 gross total adex emerged relatively unchanged YoY after the Feb ’09 gross total adex fell 13% YoY, insinuating that the downturn was not as sharp as expected and sentiment was recovering. However, the sharp contraction in net adex revenues of media companies suggests that discount rates had been raised. For example, the 1Q09 gross TV adex rose 4% YoY but net adex fell 18% YoY due to higher discount rates (+9 ppt YoY).

Media


Adex YoY change

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Jan-

08

Feb-

08

Mar

-08

Apr-0

8

May

-08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

Television Newspapers Total adex

Source: Nielsen Media Research

Table 2: TV adex share by stations TV3 8TV ntv7 TV9 RTM1 RTM2 Total

1Q09

Gross adex

RMm 179.8 80.7 78.1 48.6 11.5 32.9 431.6

% YoY 5 13 (6) 20 2 (16) 4

Discount

RMm (99.9) (61.2) (60.8) (40.5) (6.9) (19.7) (289.0)

% 55.5 75.9 77.9 83.2 60.0* 60.0* 67.0

Net adex

RMm 80.0 19.4 17.3 8.2 4.6 13.2 142.6

% YoY (7) (24) (36) (25) (18) (33) (18)

1Q08

Gross adex

RMm 170.6 71.4 83.2 40.4 11.2 39.2 416.0

Discount

RMm (84.5) (45.7) (56.3) (29.5) (5.6) (19.6) (241.2)

% 49.6 64.0 67.6 73.1 50.0* 50.0* 58.0

Net adex

RMm 86.0 25.7 27.0 10.9 5.6 19.6 174.8 * based on estimates Source: Nielsen Media Research, Media Prima

Media


2Q08 high, a tough feat to repeat

Apr ’09 gross total adex rose 2% YoY. Apr ’09 gross total adex of RM481.3m rose 2% YoY but eased 1% MoM. 4M09 gross total adex was still in negative territory at -2% YoY. Although Apr ’09 was the seventh consecutive month of YoY newspaper adex contraction, the deterioration rate was temporarily eased due to the flood of congratulatory messages to Dato’ Sri Najib Tun Razak in conjunction with his installation as Prime Minister on 3 Apr ’09.

Table 3: Apr ’09 adex (RMm) Apr-09 Apr-08 YoY chg Mar-09 MoM chg

Television 168.3 157.5 6.9% 164.8 2.2%

Newspapers 259.4 260.2 -0.3% 267.4 -3.0%

Magazines 10.4 12.1 -14.0% 10.9 -4.2%

Radio 23.9 23.7 1.1% 25.3 -5.3%

Cinema 1.5 1.3 21.7% 1.3 21.0%

Outdoor 7.6 8.4 -9.8% 8.0 -5.5%

Point Of Sale

7.0 6.6 6.0% 6.5 7.6%

Internet 3.1 1.8 68.6% 3.2 -3.1%

Total 481.3 471.6 2.1% 487.3 -1.2%


Table 4: YTD Apr ‘09 adex (RMm) YTD Apr-09 YTD Apr-08 YoY chg

Television 599.9 573.5 4.6%

Newspapers 997.8 1,063.1 -6.1%

Magazines 40.7 45.7 -10.9%

Radio 90.8 84.9 7.0%

Cinema 6.6 6.5 1.8%

Outdoor 32.1 32.3 -0.6%

Point Of Sale 26.8 25.5 5.0%

Internet 10.4 8.5 22.2%

Total 1,805.0 1,839.8 -1.9%


But net adex also likely lower due to higher discount rates. As mentioned earlier, net adex revenues (especially net TV adex) of the individual media company would very likely be lower due to higher discount rates. Thus, investors should be cautious when interpreting gross total adex figures, lest higher discount rates be translated into lower net adex revenues.

High May and Jun ’08 total adex base hard to beat. We believe that the May and Jun ’09 total adex will be markedly lower YoY due to the high base set last year by the Euro 2008 ad spend. We foresee that this lull may continue into Aug ’09 due to the high base set last year by the Beijing Olympics ad spend and a lack of adex- friendly events this year. Thus, media companies are likely to experience at least another two quarters of net adex revenue contractions.

Media


Monthly adex (RM)

300,000,000

350,000,000

400,000,000

450,000,000

500,000,000

550,000,000

600,000,000

Jan-

08

Feb-

08

Mar

-08

Apr-0

8

May

-08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9


Expect total adex to contract 9% in 2009

Cutting 2009 adex growth forecast to -9%. Our economics team has revised its estimates, expecting domestic GDP to contract by 3.8% this year (-1.3% previously). An unchanged total adex growth/GDP growth multiple of 2.3x (Asian Financial Crisis multiple) led us to our revised 2009 total adex growth forecast of -9% (-3% previously). While gross total adex may not contract by 9% due to the “masking” effect of higher discount rates, we estimate that net total adex will decline by as much.

Total adex and GDP growth

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total adex growth GDP growth

Sources: Nielsen Media Research, Bank Negara Malaysia

Table 5: Total adex growth/GDP growth multiple 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total adex growth -17.0% 13.5% 24.4% 2.6% 9.3% 9.7% 16.9% 3.1% 4.4% 14.8% 12.7%

GDP growth -7.5% 5.4% 8.3% 0.4% 4.1% 5.2% 7.1% 5.3% 5.9% 6.3% 4.6%

Total adex growth/ GDP growth (x)

2.3 2.5 2.9 6.4 2.3 1.9 2.4 0.6 0.7 2.3 2.8

Sources: Nielsen Media Research, Bank Negara Malaysia

General Elections

Euro 2008 Beijing Olympics

Media


4Q09 better entry- point

Weak 2Q09 earnings likely. As elaborated earlier, we believe that media companies will experience net adex revenue contractions in 2Q09 due to a lack of adex- friendly events. Moreover, many newspaper companies have stockpiled newsprint priced above USD750/t until mid-2009 (NSTP) or end-2009 (Star). Although newsprint prices have dipped to USD550/t from around USD950/t in 4Q08, the newspaper companies will not benefit from the lower prices until they exhaust their higher- priced newsprint.

Newsprint prices (USD/t)

-

100

200

300

400

500

600

700

800

900

1,000

1987 1990 1993 1996 1999 2002 2005 2008

Source: NSTP

Recovery likely only in 4Q09. As our economics team expects domestic GDP to recover 1.5% YoY in 4Q09 (after three preceding quarters of contraction from 1Q09), we believe that adex sentiment will only recover then, albeit, marginally. The newspaper companies will also begin to benefit from lower newsprint prices. Until then, we expect media companies to record losses or lower profits. In 4Q09, we would also be better able to gauge adex sentiment for 2010.

Malaysia: Quarterly real GDP growth (% YoY)

5.4 5.66.5

7.2 7.46.6

4.8

0.1

(6.2) (5.9)(4.8)

1.5

(8)

(6)

(4)

(2)

0

2

4

6

8

10

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

E

3Q09

E

4Q09

E

Sources: Bank Negara Malaysia, Maybank-IB

Media


Rich valuations, added risks – Maintain Underweight

Earnings revised during 1Q09 results season. We have incorporated a 10% adex revenue contraction in 2009 for Media Prima and Star. We conservatively assume a 1 ppt higher adex revenue contraction than the industry because TV adex (Media Prima) is more sensitive to changes in domestic GDP. Also, English newspapers (Star) is losing adex market share to Malay and Chinese newspapers. We have lowered our FY09 earnings forecasts by 26% for Media Prima and 23% for Star during the 1Q09 results season.

TV adex growth versus total adex growth

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total adex growth Television adex growth


Share of newspaper adex by language

0%

10%

20%

30%

40%

50%

60%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q09

English Chinese Malay


Astro: Value has vanished. Astro’s share price surged from the recent low of RM1.80 to as high as RM3.50 recently on rumours that it will either be: i) privatized, ii) the vehicle for Maxis’ relisting (via a Astro-Maxis merger), or iii) affected by a likely Astro-Measat merger. According to our estimates, the current share price implies that the outstanding lawsuits against it, estimated to be at least RM1.2b, have been discounted. To date, none has been settled in its favour.

Table 6: Astro DCF valuation accounting versus discounting lawsuits Account Discount

End-FY10 DCF value (RMm) 6,642.0 6,642.0

Estimated value of lawsuits (RMm) (1,200.0) -

Total 5,442.0 6,642.0

Number of FD shares (m) 2,026.5 2,026.5

DCF value/share (RM) 2.70 3.28

Source: Maybank-IB

Media


Astro: Other risks remain, downgrade to Sell. The tender for the Barclays Premier League broadcasting rights will begin soon. Astro may not retain its broadcasting rights and may lose subscribers and/or experience lower ARPUs. Telekom Malaysia will also roll out a competing IPTV based pay-TV product by year end, threatening Astro’s subscribership growth and ARPUs. Astro, at current levels, fully reflects its near-term operating prospects. We downgrade Astro from Hold on unchanged RM2.70 DCF derived TP (10.4% WACC).

Astro: Corporate exercise difficult at current levels. After running a good marathon with a 77% share price gain from its recent low, Astro now trades at 8.3x 2009 P/BV. This may pose a set-back for corporate exercise involving privatisation, as valuations are stretched. Pricing remains the wild card for the potential take-over of Maxis to indirectly list Maxis, or a merger with Measat, which may involve both cash and new shares of Astro. There may also be earnings dilution depending on how the deals are to be structured.

Media Prima: Weak TV adex a bane. Given that TV adex is very sensitive to changes in GDP and has a high operating leverage of 80%, we are concerned that Media Prima’s earnings will continue to be depressed over the next two quarters. We estimate that every 1% contraction in TV adex will decrease EPS by 3%. Unlike 2008, there are no major events this year to help shore up TV adex.

Media Prima: MPB Primedia adding to woes, maintain Sell. 70% owned Primedia continues to incur loss (1Q09: RM13.3m) and burn cash (1Q09: RM25m), affecting its ability to pare debts and pay dividends. We understand that a media fund that was supposed to acquire Primedia has only raised 50% of its intended USD100m capital. It is likely that its planned sale will be delayed. Unchanged RM1.00 TP for Media Prima implies 8x 2010 PER, 1x discount to the regional sector average.

Star: Rich valuations, maintain Sell. Valuations remain rich at 22x FY09 PER and 17x FY10 PER. Star will also not benefit from falling newsprint prices until it exhausts its newsprint stock priced at between USD770/t to USD825/t that will last until 1Q10. Although the company is confident of maintaining the 2008 DPS of 21 sen or 7% gross yield, such rich valuations implies major downside risk on share price when market liquidity dries up. Unchanged RM2.54 TP values Star at 14x end-2010 PER (13x ex-cash).

Media


Definition of Ratings

Maybank Investment Bank Research uses the following rating system:

BUY Total return is expected to be above 10% in the next 12 months

HOLD Total return is expected to be between -5% to 10% in the next 12 months

SELL Total return is expected to be below -5% in the next 12 months

Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax

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Economy & Finance

Media:Expecting another poor quarter