Upgrade to trading buy: We are turning more optimistic on the media sector in light of the sustainable recovery of industry advertising volume.
The improving economic outlook is likely to aid a recovery in sentiment among advertisers, which will improve the visibility of advertisement spend in 2010 as advertisers kept commitments on a short leash in 2009.
We think that the downside risks for advertisement volume are minimal given the favourable economic outlook and two external sporting events this year.
We continue to project 7% advertisement expenditure (adex) growth for 2010 while noting the upside potential to this estimate. In view of the favourable industry prospects, we upgrade the sector from neutral to trading buy.
For exposure, we recommend the industry laggards, Media Chinese International Ltd and Star Publications (M) Bhd, which are upgraded to trading buy, with support coming from attractive dividend yields of over 6%.
Total gross adex notched up a 7.4% growth in 2009, surpassing industry expectations of 5%-8% contraction and our projected decline of 6.2%. Advertising spending in 4Q09 was surprisingly strong as the pick-up seen in 3Q09 followed through in 4Q.The recovery of adex should spill over to 2010. Although 1H is traditionally a weaker period for adex, we think that there is little risk of a pullback in adspend in 1H10 similar to the trend seen in 1H09.
We make no changes to our 2010 adex growth projection of 7% which reflects the impact of the FIFA World Cup in June 2010 and the Commonwealth Games in 2H10.
This implies an adex-GDP growth multiplier of two times, which is higher than the average 1.6 times seen during the past three FIFA World Cups.
The recovery of total newspaper adex is still early in the curve. Although the domination of the Malay language segment should persist given the favourable demographics, the recovery of total industry volume should lead to a further decline in the rate of contraction for the English and Chinese language segments.
We view this as a sign that the worst is over for these two segments.
We were too pessimistic in our adex outlook towards the later part of 2009 and underappreciated the early recovery in advertisers’ sentiment. However, investors can still get exposure to the favourable industry fundamentals through the laggards in the sector.
We upgrade Media Chinese International from neutral to trading buy with a higher target price of 75 sen, pegged to a higher CY11 price-to-earnings ratio (PER) of 15 times from 13.5 times perviously.
The group’s earnings are likely to surprise on the upside with sustainable higher dividends to boot. Our revised dividend per share (DPS) gives a solid dividend yield of 6%.
We also raise Star Publications from neutral to trading buy. Our target price is increased to RM4.10 as we apply a higher CY11 PE of 15 times instead of 13.5 times. — CIMB Research, Feb 17
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